SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1999
Commission File Number 0-21036
BLIMPIE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
New Jersey 13-2908793
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
740 Broadway, New York, NY 10003
(Address and Zip Code of Principal Executive Offices)
(212) 673-5900
(Registrant's telephone number including area code)
Securities Registered Under Section 12(b) of the Exchange Act:
Common Stock, $.01 Par Value
Securities Registered Under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |_| No |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of November 15, 1999 was approximately
$8,027,000. Solely for purposes of the foregoing calculation all of the
registrant's directors and officers are deemed to be affiliates.
There were 9,470,926 shares of the registrant's common stock outstanding as of
November 15, 1999.
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Table of Contents
Item
Number Page
- ------ ----
PART I 3
1. Business 3
Forward-looking Statements 3
General 3
Financial Information About Business Segments 5
The Blimpie Outlet Franchise 5
The Pasta Central Outlet Franchise 6
The Maui Tacos Outlet Franchise 6
Our Subfranchises and Master Licenses 6
Services to Franchisees 7
Outlet Properties 8
Outlet Locations 10
Government Regulation 10
Trademarks, Trade Names, Service Marks and
Logos; Know-How and Methods of Operation 11
Research and Development 13
Business Expansion 13
Competition 15
Employees 15
2. Properties 16
3. Legal Proceedings 16
3a. Our Executive Officers 17
4. Submission of Matters to a Vote of Security Holders 19
PART II
5. Market for Common Equity and Related Stockholder Matters 19
6. Selected Financial Data 20
Management's Discussion and Analysis of Financial
7. Condition and Results of Operations 21
8. Financial Statements 29
Changes in and Disagreements With Accountants on
9. Accounting and Financial Disclosure 29
PART III
10. Directors, Executive Officers 30
11. Executive Compensation 30
Security Ownership of Certain Beneficial Owners and
12. Management 32
13. Certain Relationships and Related Transactions 33
PART IV
Exhibits, Financial Statements, Schedules and Reports of
14. Form 8-K 36
14(a)(1) Financial Statements 36
14(a)(2) Financial Statement Schedule 36
14(a)(3) Exhibits 36
14(b) Reports on Form 8-K 39
SIGNATURES 40
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PART I
ITEM 1. BUSINESS
Forward-looking Statements
Certain forward-looking statements are included in this report. They use
such words as "may," "will," "expect," "believe," "plan" "anticipate" and other
similar terminology. These statements reflect management's current expectations
and involve a number of risks and uncertainties. Actual results could differ
materially due to changes in: global and local business and economic conditions;
legislation and governmental regulation; competition; success of operating
initiatives and advertising and promotional efforts; food, labor and other
operating costs; availability and cost of land and construction; adoption of new
or changes in accounting policies and practices; consumer preferences, spending
patterns and demographic trends; political or economic instability in local
markets; and currency exchange rates.
General
We engage in franchising, subfranchising and master licensing of the
trademarks, trade names, service marks, logos, know-how, marketing concepts and
marketing programs for each of our brands. We franchise our BLIMPIE(R) Subs &
Salads and PASTA CENTRAL(TM) brands directly through our Company, and we
franchise the MAUI TACOS(TM) and SMOOTHIE ISLAND(TM) brands through our majority
owned subsidiary, Maui Tacos International, Inc. ("MTII"). Our menu of BLIMPIE
Subs & Salads, consisting of quick-service, healthy, sub sandwiches, is offered
by approximately 2,100 franchise outlets operating throughout the United States
and in 13 other countries. Blimpie(R) is our registered trademark. Unless
otherwise specified, the term "Blimpie" includes Blimpie(R). As of June 30,
1999, there were three Pasta Central restaurants operating in the United States
and Puerto Rico, one Company-owned Maui Tacos restaurant located in Atlanta,
Georgia and 30 Smoothie Island locations located throughout the United States.
The baked pasta meals served at our Pasta Central outlets address current eating
trends for eat-in or take home replacement meals. Maui Tacos restaurants provide
a healthy, affordable menu of "Maui-Mex" items, including traditional Mexican
food marinated in Hawaiian spices. Smoothie Island is a selection of blended
beverages of frozen yogurt, fruit and nutritional supplements sold through the
Blimpie, Pasta Central, and Maui Tacos locations. We also provide professional
store design service and equipment sales through our wholly-owned subsidiary, B
I Concept Systems, Inc. Currently, we do not operate any of the subfranchisor or
master licensor areas within the Blimpie International system.
A franchisee pays a non-refundable initial franchise fee in connection
with an executed franchise agreement which grants to the franchisee the right to
use the various trademarks, trade names, service marks, logos, marketing
concepts and marketing programs, and to operate an outlet at a location to be
agreed upon by the franchisee and us in accordance with the operations manual
which we issue to our franchisees (the "Operations Manual").
Each franchisee is obligated to purchase raw materials, both food and
non-food, from authorized and designated distributors who may only sell
authorized and approved raw materials purchased from approved manufacturers and
suppliers. We negotiate relationships with manufacturers and suppliers on a
national level for all products except produce, whether or not they bear our
logos. We negotiate and enter into recognition agreements authorizing approved
distributors to deliver raw products to our franchise outlets from approved
manufacturers and suppliers. All products purchased by franchisees on a local
level must meet our quality standards. Franchisees may request approval of
additional manufacturers, suppliers or distributors subject to our approval. We
base our approval upon a number of conditions including price, quality, ability
to service the system on a national basis and such other reasonable standards as
we may promulgate from time to time. Currently, there are no other
manufacturers, suppliers or distributors approved by us other than those that we
have designated.
We believe that we could easily obtain alternate manufacturers, suppliers
and distributors should any of our current manufacturers, suppliers or
distributors become unwilling or unable to provide our
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franchisees with the authorized required raw materials.
Our rights regarding the various Blimpie trademarks employed by all of our
Blimpie outlets located throughout the world, and the methodology and know-how
which comprise our Blimpie marketing concepts and programs, are limited to
specific geographic regions throughout the world, pursuant to written licensing
agreements between us and Metropolitan Blimpie, Inc. ("MBI"), a company with
which we have no affiliation. See "Business - Trademarks, Trade Names, Service
Marks and Logos; Know-How and Methods of Operation." Since our incorporation in
1977, the chain of franchised Blimpie outlets has expanded to encompass 2,097
outlets located in 46 states, Argentina, Canada, Cyprus, Dominican Republic,
Jordan, Panama, Poland, Portugal, Saudi Arabia, South Africa, Spain, Venezuela,
and Great Britain (as of June 30, 1999). See "Business - Outlet Locations."
There are approximately 250 additional Blimpie outlets which are controlled by
MBI that are located in areas of the country in which we do not possess rights
to license the Blimpie trademarks or sell franchises or subfranchises.
Commencing in 1977, we began selling individual outlet franchises and area
subfranchises. In 1995, we began selling master licenses for various territories
located outside of the United States. We and MBI own, respectively, undivided
60% and 40% interests in the Blimpie Trademarks. We distribute the
internationally registered Blimpie Trademarks pursuant to an agreement with MBI
which provides for automatic annual renewals until July, 2090. See "Business -
Trademarks, Service Marks, Trade Names and Logos; Know-How and Methods of
Operation."
We derive our revenue primarily from four sources: (1) store equipment
sales, (2) continuing franchise fees based upon each franchisee's gross sales,
(3) fees from the grant of individual outlet franchises and (4) fees from the
grant of subfranchises to Subfranchisors and the grant of master licenses to
Master Licensors worldwide. Individual outlet franchises are granted for both
"traditional" locations such as free-standing buildings, shopping malls, and
in-line urban store clusters, and "new-concept" locations, i.e., convenience
stores, institutional food service entities, colleges, schools, mass feeders
(such as institutional food service providers and in-facility commissaries) and
hospitals. These locations may sell or otherwise make all or part of our various
food product brands available to their customers, clientele or attendees through
facilities that may or may not contain all of the components normally associated
with a traditional outlet, such as kitchen, food preparation and customer dining
areas. We also have commenced developing several new types of product
distribution formats, some of which we have begun to introduce and some of which
we anticipate introducing in the future. One such program involves the sale of a
limited number of prepared Blimpie sandwiches and salads maintained in
"Grab'nGo" refrigeration cases at Company-approved "distribution points"
operated by franchisees and non-franchisees. There are approximately 200
Grab'nGo locations operating in the United States. Currently, we are developing
new types of carts, kiosks, vending machines and other mobile branded product
delivery systems. We further anticipate the development of a format that would
allow the sale of some of our branded products at supermarkets and other retail
locations.
The initial franchise fee currently is $18,000 for a traditional Blimpie
location, $28,000 for a co-branded Blimpie / Pasta Central location, $20,000 for
a co-branded Maui Tacos / Smoothie Island location and $2,500 for a Smoothie
Island location. The initial franchise fee for a new-concept franchise can range
between $1.00 and $15,000 depending on the number of new-concept transactions
executed, the location of the new-concept franchisee, the marketing area in
question and other subjective factors. After a location has been found and the
lease or purchase thereof has been negotiated by the franchisee and approved by
us, the franchisee then constructs and installs the outlet in accordance with
design and layout specifications provided by us. Franchisees are required to
maintain specified standards as to food quality, menu items, uniforms,
appearance, sanitation and all other aspects of outlet operations.
In addition to the initial franchise fee, a franchisee also pays all other
costs and expenses related to the installation of the outlet at an approved
location. An equipment package, which typically includes slicing machines,
refrigeration cases, food preparation counters and signs bearing the registered
logos, costs approximately $25,000 to $40,000 for a Blimpie outlet, and may cost
in excess of $100,000 for a co-branded Blimpie / Pasta Central or Maui Tacos /
Smoothie Island outlet. Construction of an outlet, which generally includes
walls, floor, ceiling, plumbing and electrical work required to modify an
existing
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premises to an approved design costs between $10,000 to $80,000 to complete.
These costs, plus the initial lease security payable to the owner of the leased
premises and utility deposits to the various utility companies and recommended
minimum opening inventory and working capital aggregating approximately $5,000
to $15,000, comprise the approximate cash investment of an average franchise.
Franchisees are required to pay continuing franchise fees of 6% of their
weekly gross sales, as well as mandatory advertising contributions of 4% of
weekly gross sales. Blimpie outlet Franchisees who acquired their franchise
agreements before the Fall of 1994 are required to pay 6% continuing fees, but
mandatory advertising contributions of 3%. Two percent of the advertising
contributions made by franchisees in the same general marketing area are used
for the payment of advertising which benefits all franchisees in that local
marketing area, while the remainder is used for national advertising.
International franchisees pay continuing franchise fees of 8% and advertising
contributions of 2%. Currently, we are considering changing the allocation of
these advertising contributions for our domestic markets. In the upcoming year,
we expect to increase the percentage of the advertising contributions which are
used in the local marketing areas, and to decrease the percentage used for
national advertising. The total advertising contributions by franchisees will
remain unchanged as a percentage of their weekly gross sales.
Financial Information About Business Segments
See Note 14 to our audited consolidated financial statements.
The Blimpie Outlet Franchise
A Blimpie outlet is a non-cooking sandwich outlet characterized by
portion-controlled meat and cheese combinations generally sold on six inch or
twelve inch French/Italian white or wheat bread garnished with special Blimpie
spices and dressings along with salads and other food items. The sandwich
products sold in these outlets are known as Blimpie sandwiches and the outlets
themselves are known as Blimpie outlets.
We require each of our franchisees to offer food products from a list of
products authorized by us. Such products for a Blimpie outlet include hot
sandwiches, including items such as Italian meatball sandwiches and chicken
breast sandwiches, and cold sandwiches, including items such as roast beef and
club sandwiches. Our "signature" item is the "Blimpie Best" sandwich, which
consists of ham, salami, cappacola, prosciuttini and provolone. In addition, all
Blimpie sandwiches are dressed at no additional charge with tomatoes, lettuce,
onions, oil and vinegar and oregano. We establish recommended prices for food
products which franchisees may or may not adopt. Accordingly, such prices differ
depending upon geographic location. For example, in New York City a "Blimpie
Best" may sell for $3.89, while in Atlanta, Georgia, the same sandwich may be
purchased for $2.89.
In addition to the authorized Blimpie sandwich line, Blimpie outlets also
offer a variety of salads, baked products, and a variety of other products
produced mostly from raw frozen dough products and baked in the approved Blimpie
deck oven installed in each Blimpie outlet. Prices for all authorized products
vary depending upon geographic location.
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The Pasta Central Outlet Franchise
A Pasta Central outlet offers Italian-style baked pasta dishes, gourmet
pizzas, and salads for in-store dining, take-away, or for final preparation and
consumption at home. The concept is currently being developed as a co-brand with
our BLIMPIE Subs & Salads franchises as a way to increase the sales potential,
particularly during the dinner day part, for co-branded locations, with only a
small increase in the initial investment.
Pasta Central's menu items include baked pasta dishes, gourmet pizzas,
salads, and dessert items. Its "signature" item is the "Central Special," which
consists of penne pasta tossed with a cream-based tomato sauce and served with
grilled chicken and shaved cheese. Menu items are offered individually or in
various combinations at recommended price points, which the franchisee may or
may not adopt.
The Maui Tacos Outlet Franchise
A Maui Tacos outlet offers quality Mexican items like tacos and burritos
in a quick-service restaurant atmosphere. The menu includes typical Mexican
offerings using beef, chicken or seafood which has been marinated in Hawaiian
spices. The outlets are known as Maui Tacos outlets.
The Maui Tacos product line consists of traditional Mexican items such as
tacos, quesadillas, and burritos filled with charbroiled steak, chicken, and
seafood entrees marinated in pineapple and lime juices with Hawaiian spices. As
an accompaniment, tortilla chips, guacamole, and a variety of salsas are
available.
Our Subfranchises and Master Licenses
Each Subfranchisor of one of our brands pays a subfranchise fee that is
based upon the population of the subfranchise territory. At present, the fee,
which can typically range from $10,000 to over $1,000,000, is based upon a
calculation of $.10 per person located within the area that is the subject of
the subfranchise for Blimpie and Maui Tacos subfranchise territories. Pasta
Central territories are managed by Blimpie subfranchisors, and Smoothie Island
territories are managed by either the Blimpie or Maui Tacos subfranchisor in the
area. We do not charge a separate fee for the right to subfranchise our Pasta
Central or Smoothie Island brands for existing Blimpie or Maui Tacos
subfranchisors. In addition to paying our subfranchise fees, each Subfranchisor
must join and make contributions to a Subfranchisor advertising cooperative
association sponsored by us, which purchases franchise advertisements in
national periodicals for the benefit of all Subfranchisors. A Subfranchisor's
annual contribution to the advertising cooperative typically ranges between
$1,200 and $6,000. We make voluntary contributions to the cooperative
association that match the contributions made by the Subfranchisors.
We award subfranchises consisting of a specifically defined territory
within which the Subfranchisor has the exclusive right to solicit potential
purchasers of our franchises for a period of 50 to 60 years. Such individual
purchasers of our franchises then purchase, or sublicense, the right to use our
trademarks, trade names, service marks, logos, marketing concepts and marketing
programs directly from us.
Our standard form of subfranchise agreement grants to the Subfranchisor
the exclusive license to purchase the territory for a one year period, followed
by four to six renewal terms, all but the last of which are annual in duration.
The license is subject to our continuing right to market and sell the
trademarks, trade names, service marks, logos, marketing concepts and marketing
programs within specified territories. If all terms and conditions of the
subfranchise agreement have been met during the initial one year term and each
of the subsequent one year renewal terms, a 50 to 60 year right is granted
during the final renewal term upon payment of the fee set forth in the
agreement. Each subfranchise agreement obligates the Subfranchisor to satisfy
all of the operational obligations owed by us to each franchisee within the
Subfranchisor's territory at the sole expense of the Subfranchisor; to use his
best efforts to promote the sale of franchises within his territory; and to meet
certain sales quotas. In the event of the
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Subfranchisor's default, each such agreement is terminable by us upon giving
thirty days' notice under certain provisions of the agreement. The Subfranchisor
may terminate the agreement upon certain defaults by us, if such defaults remain
uncured for more than 30 days to more than 75 days, depending on the nature of
the default.
Subfranchisors who are in full compliance with the obligations imposed
upon them pursuant to the subfranchise agreement are entitled to receive one
half of each initial franchise fee (after deductions for sales commissions,
design, and training fees) paid by new franchisees establishing outlets within
the Subfranchisor's territory, and one half of the 6% of gross sales continuing
franchise fees paid by such franchisees pursuant to their respective franchise
agreements.
For territories outside of the United States, Canada and Puerto Rico, we
grant master license agreements that are generally equivalent to a domestic
subfranchise agreement. The significant differences between a master license and
a subfranchise are that the master license fee may be as low as $0.01 per person
located in the master license territory; the individual franchisees pay a
continuing fee royalty of 8% of gross sales, which is split 5% to the master
licensor and 3% to us; the individual franchisee pays an advertising
contribution of 2% of gross sales; and the master licensor, not us, is
responsible for establishing and managing the advertising cooperatives within
the territory.
We market and sell franchises, subfranchises and master licenses through
advertisements placed in local and national periodicals, through presentations
at trade shows and franchise conventions, through referrals from existing
franchisees, Subfranchisors and Master Licensors and through informational
materials placed in operating outlets.
As of June 30, 1999 there were 85 existing domestic Blimpie
subfranchisors, at least one of which is located in each of the 46 states in
which the 2,040 domestic Blimpie outlets are located; five Canadian Blimpie
subfranchisors, one of which is located in each of the Provinces of Alberta,
British Columbia, Manitoba and Ontario in which 19 Blimpie outlets are located;
one Blimpie subfranchisor in Puerto Rico in which three Blimpie outlets are
located; and 15 Master Licensors for the countries of Argentina, Bahrain,
Cyprus, Dominican Republic, Egypt, Great Britain, Greece, Jordan, Kuwait,
Lebanon, Northern Ireland, Oman, Panama, Peru, Poland, Portugal, Qatar, The
Republic of Ireland, Romania, Saudi Arabia, South Africa, Spain, United Arab
Emirates, Uruguay and Venezuela in which collectively there are 35 outlets
located. Included in these Blimpie outlets were three Blimpie / Pasta Central
co-branded outlets, one each in Idaho, Missouri and Puerto Rico.
Also as of June 30, 1999, there were five domestic Maui Tacos
subfranchisors and one Company-owned outlet in operation.
Such subfranchises and master licenses range in size, depending upon the
specific geographical area involved, from entire countries or states to a
specific county or counties. See "Business - Outlet Locations"; "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations."
Services to Franchisees
On a continuing basis, franchisees in the U.S., Canada and Puerto Rico are
furnished with advisory assistance from us regarding outlet operations, new menu
items and new marketing aids developed by us. No additional fees are charged to
franchisees for these services or for the training program described below. We
also provide, when we, in our sole discretion deem it appropriate to do so,
services to franchisees by visiting their outlets and inspecting them for
quality, cleanliness and service. A written operation inspection analysis is
provided after each inspection. Outside of the U.S., Canada and Puerto Rico,
Master Licensors provide all such services, with our assistance.
We provide training for new franchisees in the U.S., Canada and Puerto
Rico consisting of (i) forty hours of pre-training classes at an existing outlet
approved by us, (ii) one week of classroom training at our Georgia training
center, and (iii) an additional 80 hours of operational post-training at an
existing outlet
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approved by us. We provide training for new Subfranchisors and Master Licensors
consisting of two weeks of classroom training at our Georgia training center,
plus 80 hours of operational training at an existing outlet approved by us. The
training program addresses all phases of outlet operations from service training
to financial management, including the various controls of the marketing system
specified in the Operations Manual. The training program covers inventories,
ordering procedures, hiring and firing, equipment maintenance, product controls,
bookkeeping and accounting. The training provided to Subfranchisors and Master
Licensors also encompasses franchisor-related activities including, but not
limited to, franchise sales, communication, analysis of franchisee construction
needs and the fulfillment thereof.
After an outlet is constructed or renovated and the equipment installed,
one of our representatives or a representative of the Subfranchisor or Master
Licensor generally is on site for one week after the outlet opens for the
purpose of providing additional operational assistance and supervisory
functions. Each Subfranchisor or Master Licensor is responsible for providing
each franchisee within his territory with operational assistance throughout the
term of his subfranchise or master license agreement. Generally, our
representative is only on site as described above for the opening of the first
three outlets that open within a territory. However, our representatives remain
available on a continuing basis to provide additional support to franchisees,
Subfranchisors and Master Licensors. As an additional means of support, we
maintain a toll-free hotline by which franchisees and Subfranchisors may contact
our representatives for advice and assistance regarding operational matters.
Outlet Properties
Each traditional franchisee in the U.S., Canada and Puerto Rico generally
is required to lease the outlet premises from one of our designated leasing
subsidiaries. Each franchisee outside of the U.S., Canada and Puerto Rico
generally is required to lease the outlet premises from a corporation in which
the Master Licensor owns 50% and we or our designee owns 50%, or such franchisee
is required to provide a collateral assignment of the lease to the jointly owned
corporation. In all such cases, it is the franchisee's sole obligation to find
the premises to be leased and to obtain our approval of the site of his
franchised outlet. Once the location is approved, we (or our leasing subsidiary)
will negotiate and enter into a lease of the premises, subject to the
franchisee's approval. Subsequently, we (or our leasing subsidiary) will enter
into a sublease with the franchisee for the entire term and renewal term, if
any, of the lease of the premises less one day (generally 10 to 20 years). The
percentage royalty and advertising payments due under the franchise agreement
constitute additional rent under the sublease. Payment of the percentage
royalties and advertising fees under the franchise agreement satisfies the
additional rental payment obligation under the sublease. All rents specified in
the lease are paid directly by the franchisee to the landlord specified in the
lease pursuant to the cancelable authorization by the subsidiary leasing
corporation set forth in the sublease. Accordingly, except in a rare case in
which we or one of our subsidiaries may be the owner and landlord of a
franchisee's outlet, no funds which constitute rental payments are ever
collected for use by us. We have no payment or performance obligations with
respect to any of the existing outlet location leases, except for less than one
percent of those leases.
The leasing/subleasing mechanism described above enables us to maintain
control of each outlet premises and to enforce franchisee compliance with our
authorized product line and quality standards. Additionally, since percentage
royalties and advertising fees constitute additional rent under the subleases,
the leasing/subleasing mechanism gives us an additional vehicle through which to
enforce our rights regarding receipt of such payments and payments to the
landlord of the outlet premises. Typically, upon a franchisee's failure to make
timely rental payments, our leasing subsidiary will receive notice from the
landlord. The franchisee is then notified of its default and is given the
opportunity to cure the default. If the franchisee fails to cure the default,
eviction proceedings usually will be instituted by either the unaffiliated
landlord or our leasing subsidiary. Following eviction of the franchisee, we,
with the landlord's approval, will attempt to sell the existing franchised
outlet to a new franchisee who will take possession of the premises subject to
the terms of the prior lease and sublease, or under a new lease negotiated by us
with the landlord, and a new sublease. In cases where a lease has been
terminated and/or a franchisee has been evicted and a replacement franchisee
cannot be obtained by us to cure all defaults and operate or re-open the outlet
in question, it is our general policy either to abandon the location and the
leasing
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subsidiary, or to dispose of ownership of the leasing subsidiary to unaffiliated
parties for nominal consideration.
Substantially all leases executed by our various leasing subsidiaries
during the past five years include provisions (and it is our intention that all
future leases will include provisions) that the respective landlords thereunder
will not directly or indirectly claim or institute legal proceedings against us.
All of the 2,097 existing Blimpie and Blimpie / Pasta Central outlets and
the one Maui Tacos outlet (as of June 30, 1999) are operating in premises
located in free-standing buildings, shopping malls, shopping centers, in-line
urban store clusters, convenience stores, institutional food service facilities,
colleges, schools, mass feeders, hospitals, bowling alleys, golf courses and
subway stations. The size of an outlet varies from 400 square feet to
approximately 3,500 square feet. Since the cost of renovating pre-existing
premises into an approved outlet is dependent upon the condition and prior use
of the premises, an exact estimation is impossible. Historically, the cost of
outlet construction/renovation, which must be completed in accordance with
design and layout specifications provided by us, and at the franchisee's sole
expense, has ranged from as low as $10,000 to as high as $80,000. The franchisee
must also equip the outlet at the franchisee's sole cost and expense. Such
equipment costs total, in the aggregate, approximately $25,000 to $100,000.
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Outlet Locations
As of June 30, 1999, we operated one Maui Tacos outlet in Atlanta,
Georgia. The following table sets forth the number of Blimpie franchised outlets
in operation as of June 30, 1999, and includes three co-branded Blimpie / Pasta
Central locations, which were located in Idaho, Missouri and Puerto Rico:
Number
of
Location Outlets
United States outlets:
Alabama 23
Alaska 7
Arizona 79
Arkansas 26
California 80
Colorado 44
Connecticut 35
Florida 189
Georgia 205
Hawaii 9
Idaho 16
Illinois 39
Indiana 60
Iowa 64
Kansas 15
Kentucky 29
Louisiana 46
Maine 3
Massachusetts 5
Michigan 87
Minnesota 31
Mississippi 15
Missouri 60
Montana 7
Nebraska 26
Nevada 30
New Hampshire 2
New Jersey 51
New Mexico 13
New York 85
North Carolina 70
North Dakota 6
Ohio 93
Oklahoma 13
Oregon 15
Pennsylvania 50
Rhode Island 7
South Carolina 56
South Dakota 3
Tennessee 76
Texas 135
Utah 36
Washington 38
West Virginia 18
Wisconsin 32
Wyoming 11
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United States total 2,040
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International outlets:
Argentina 8
Canada 19
Cyprus 3
Dominican Republic 1
Jordan 2
Panama 2
Peru 0
Poland 3
Saudi Arabia 3
South Africa 2
Spain 1
Great Britain 4
Portugal 1
Venezuela 5
Puerto Rico 3
-----
International total 57
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Total 2,097
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Government Regulation
The Federal Trade Commission and various state governmental authorities
have adopted laws regulating franchise operations and the franchisor-franchisee
relationship. Such laws vary from merely requiring the filing of disclosure
documents concerning the offer and sale of franchises to the application of
statutory standards regulating established franchise relationships. The most
common provisions of those laws regulate the substance of franchisor-franchisee
relationships and establish restrictions on the ability of franchisors to
terminate or to refuse to renew franchise agreements. Some states' laws contain
provisions designed to ensure the fairness of the franchise agreements to
franchisees by, among other
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means, including limitations, prohibitions and/or restrictions pertaining to the
assignability of the rights of franchisees; a franchisee's right to own or be
involved in other businesses; franchisee membership in trade associations; and
franchisor interference with franchisee employment practices.
In addition to the foregoing state regulations, the Federal Trade
Commission has adopted rules and guidelines that require franchisors to make
certain disclosures to prospective franchisees prior to the offer or sale of
franchises. In addition to requiring the disclosure of information necessary for
a franchisee to make an informed decision on whether to enter into a franchise
relationship, the guidelines delineate the circumstances in which franchisors
may make predictions on future sales, income and profits. We do not furnish or
authorize our salespersons to furnish any oral or written information on the
actual or projected sales, costs, income or profits of a franchise. Failure to
comply with such rules constitutes an unfair trade practice under Section 5 of
the Federal Trade Commission Act.
Several state and federal courts have revealed a tendency to be
sympathetic to and desirous of protecting the rights and interests of
franchisees in litigation with their franchisors. Taking such tendencies into
consideration, we may modify our licensing activities, or we may choose not to
enforce certain of our rights and remedies under certain franchise and lease
agreements. However, we do not believe that such modifications, delays, or
failures will have a materially adverse effect on our operations. The law
applicable to franchise operations and relationships is rapidly developing, and
we are unable to predict the effect on our operations of additional requirements
or restrictions, which may be enacted or promulgated, or of court decisions
which may generally be adverse to the franchise industry. We believe that we
have conducted and are conducting our business in substantial compliance with
all applicable laws and regulations governing our operations.
The franchisees' outlets are also subject to regulatory provisions
relating to the wholesomeness of food, sanitation, health, safety, fire, land
use and environmental standards. Suspension of certain licenses or approvals,
due to failure to comply with applicable regulations or otherwise, could
interrupt the operations of the affected outlet or otherwise adversely affect
the outlet. The franchisees are also subject to federal and state laws
establishing minimum wages and regulating overtime and working conditions.
Changes in such laws could result in an increase in labor costs that could
adversely affect the outlet.
We believe that we are conducting our business in substantial compliance
with all applicable laws and regulations governing our operations.
Trademarks, Trade Names, Service Marks And Logos; Know-How And Methods Of
Operation
We regard our trademarks and the methodologies and know-how which comprise
each of the marketing concepts and programs employed by our various brands
(each, a "Marketing System") as having significant value and as being important
to our marketing efforts. Each of our franchise and subfranchise agreements
authorizes our franchisees and subfranchisors, respectively, to use the
trademarks and Marketing System pertaining to the brand which is the subject of
such agreements, along with all other future trademarks pertaining thereto.
Our trademarks and Marketing Systems may only be used by traditional and
new-concept outlets that sell our products, and by our licensed distribution
points. There are specific product limitations regulating each outlet so that
franchisees may sell only those products authorized by their particular
franchise agreement and Operations Manual, or that we otherwise approve. Any
variation from the authorized product line is actionable by us.
We currently own an undivided 60% interest in the domestic and
international Blimpie trademarks. The remaining 40% interest in those trademark
rights is owned by MBI. Through various agreements which we have entered into
with MBI, the trademark rights are shared by both MBI and us. Both companies
have the exclusive rights to the trademarks in certain domestic territories, and
for the remaining territories, we have licensed the rights to the trademarks
from MBI in exchange for a licensing fee generally equal to 30% of the revenues,
after deducting direct expenses, incurred by us in the territories.
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The territories for which we have licensed the right to distribute the
Blimpie trademarks and license the Blimpie Marketing System from MBI include:
Alaska, Arkansas, Northern California, Colorado, Hawaii, Iowa, Kansas, Missouri,
Nebraska, Nevada, North Dakota, Oklahoma, South Dakota, and all territories
outside of the United States.
The territories in which MBI has retained the right to distribute the
Blimpie trademarks and license the Blimpie Marketing System (the "MBI
Territories") include Delaware, Maryland, New Jersey (except for the Counties of
Morris, Warren, Sussex, Bergen, Passaic and Essex, but including the Cities of
Alpine, Belville, Cliffside Park, Cloister, Cresskill, Demarest, Dumont, East
Rutherford, Edgewater, Englewood, Englewood Cliffs, Fairview, Fort Lee,
Hackensack, Harrington Park, Haworth, Old Tappan, Northvale, Nutley, Norwood,
Palisades Park, Paterson, Ridgefield, Ridgefield Park, Rock Leigh, Rutherford,
South Hackensack and Tenafly), the counties of New York, Queens, Kings,
Richmond, Rockland, Bronx and Westchester in New York, Pennsylvania (from the
eastern border westward to and including Harrisburg), Virginia and Washington,
D.C.
We possess the exclusive right to license the Blimpie trademarks and
Blimpie Marketing System in the area of Northern California between the southern
border of Monterrey and the northern border of the state, including the counties
of Monterrey, San Benito, Santa Cruz, Santa Clara, San Mateo, Alameda, Mariposa,
San Francisco, Contra Costa, Marin Novato, Mono, Tudumne, Calaveras, Napa,
Solano, Sonoma, Amedor, Alpine, Sacramento, Yolo, Sutter, El Dorado, Placer,
Colusa, Nevada, Lake, Yuba, Mendocino, Glenn, Sierra, Butte, Tehama, Plumas,
Humboldt, Trinity, Shasta, Lassen, Del Norte, Siskiyou and Modoc. Blimpie of
California, Inc. ("BOC"), a corporation which is not affiliated with us,
possesses the exclusive right to license the Blimpie trademarks and Blimpie
Marketing System throughout the balance of the state of California. A number of
franchised Blimpie outlets located in Southern California have been established
pursuant to trademark licenses granted by BOC. We receive 2.5% of the gross
sales by such franchisees, and share half of such receipts with MBI.
The agreement we entered into with MBI in 1991 with respect to the
licensing of the Blimpie trademarks and the Blimpie marketing system outside of
the United States (the "1991 Agreement") provides for automatic annual renewals
until July 2090, provided that we make all payments due to MBI, subject to a
minimum annual payment of $100,000. If we ever failed to satisfy our payment
obligations under that agreement, we would lose the right to license the Blimpie
trademarks and Blimpie Marketing System outside of the U.S. and throughout the
MBI Territories. From July 1991 through June 30, 1999, we paid approximately
$3,365,000 to MBI pursuant to the 1991 Agreement. We have no reason to believe
that MBI would ever seek to cancel or terminate the 1991 Agreement. Furthermore,
we believe that we will continue to comply with the terms of the agreement, and
that it will remain in effect throughout its entire permissible term. However,
no assurance can be given that the agreement will remain in full force and
effect until July 2090.
We acquired our 60% interest in the trademark rights noted above through
various transactions with Anthony P. Conza, our Chairman and Chief Executive
Officer ("Conza") and David L. Siegel, our Chief Operating Officer ("Siegel").
We received a 99 year license in the domestic rights in the Blimpie trademarks
from Conza and Siegel in 1976. In 1997, we purchased our share of the
international rights to the Blimpie trademarks from Conza and Siegel under an
agreement which was negotiated on our behalf by a Committee of the Board of
Directors that consisted solely of outside directors. We agreed to pay $4.5
million ($3 million to Conza and $1.5 million to Siegel), plus certain
contingent fees which were to take effect after cumulative international
revenues exceeded $5 million, in consideration for their sale of such rights to
us. That agreement further provided that Conza and Siegel could receive annual
payments totaling $150,000 per year for 50 years, or could elect, at any time
prior to January 1, 2001, to receive a lump sum distribution of $3 million on
January 1, 2001, with $2 million payable to Conza and $1 million payable to
Siegel.
In February 1999, both Conza and Siegel elected to receive the lump-sum
payment. They also agreed to terminate the 99-year license for the domestic
trademark rights and contribute those rights to us. In consideration for the
contribution of these trademark rights and in satisfaction of the lump-sum
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payment due in 2001, we amended our 1997 international trademark agreement with
Conza and Siegel, and paid the full $3 million payment in February 1999.
In 1997, we acquired, in connection with our majority interest in MTII,
all of the Maui Tacos trademarks. MTII owns all of those trademarks, as well as
the Maui Tacos name. Additionally, MTII owns the trademarks relating to Smoothie
Island and Smoothie Island Juice Bar.
Also, we are the sole owners of the trademark rights relating to Pasta
Central.
To our knowledge, there are no infringing uses of any of any of our
trademarks in any territory where any of our franchisees has established or
attempted to establish operations which would in any way materially affect the
use of such trademarks by us or by any of our franchisees.
Research and Development
We conduct ongoing development of new menu items and test markets such
items, as well as new company-developed food marketing aids, in selected
outlets. Although such research and development activities are important to our
business, the amounts that we have previously expended for these activities have
not been material.
Business Expansion
Equipment Leasing. We provide financing to new and existing franchisees
primarily through entering into participation arrangements with unaffiliated
third party finance/leasing entities. As of June 30, 1999, we were participants
in the financing of 60 of such equipment leases totaling $497,000. We believe
that such programs will result in an increase in financing profits and an
increase in franchise sales due to the greater availability of equipment to new
and existing franchisees. However, no assurances can be given in that regard.
Domestic Expansion. We plan to grow through continued development of
traditional and new-concept Blimpie outlets co-branded Blimpie / Pasta Central
outlets, Maui Tacos outlets and Smoothie Island outlets co-branded with the
other outlets throughout the U.S. We also plan to continue to develop new types
of Blimpie distribution points throughout the U.S., including expanding the
vending machine program, commencing a school lunch program, and other
initiatives.
International Expansion. We continue to grow internationally through the
sale of master license agreements. The agreements are analogous to subfranchise
agreements, except that the master licensor or one of our wholly-owned
subsidiaries enters into franchise agreements directly with the franchisees in
each international market. The master licensor, in effect, is our representative
in that specific country and is obligated to provide all of the support services
and selling activities required to develop the franchised market. Initially,
however, we will provide administrative support to assist the master licensors.
As of June 30, 1999, we had entered into Blimpie master license agreements for
the following countries: Argentina, Bahrain, Canada (provinces of Alberta,
British Columbia, Manitoba and Ontario), Cyprus, Dominican Republic, Egypt,
Great Britain, Greece, Jordan, Kuwait, Lebanon, Northern Ireland, Oman, Panama,
Peru, Poland, Portugal, Puerto Rico, Qatar, The Republic of Ireland, Romania,
Saudi Arabia, South Africa, Spain, United Arab Emirates, Uruguay and Venezuela.
The master licensor for Puerto Rico has purchased the master license for Pasta
Central as well.
We anticipate that we will execute master license agreements for our
Blimpie and other brands in various other countries in the near future. We also
plan to develop joint venture agreements with various entities such as petroleum
marketers or convenience store chains for the installation of Blimpie and other
outlets in such entities' locations. There can be no assurance, however, that we
will consummate any such transactions.
Development of Blimpie Branded Products. Our long term strategic plan
includes developing products for sale at distribution points such as Blimpie
restaurants, supermarkets and convenience stores.
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We began selling Blimpie branded peppers, potato chips and potato sticks during
the year ended June 30, 1998 in a limited number of Blimpie outlets. We intend
to expand this initiative by increasing the number of Blimpie branded products
and the number of locations in which they are sold. No assurances can be given,
however, that the sale of Blimpie branded products will continue to generate
increased revenue for us.
Acquisition of Existing Franchise Concept. On October 29, 1997 we entered
into an agreement with Maui Tacos International, Inc. (MTII) which resulted in
our acquisition of a majority interest in MTII. See "Business - Business
Expansion - Development of New Franchise Concepts" below. We believe that our
mature infrastructure is capable of supporting additional franchise systems, and
that additional acquisitions of this nature will open up additional market
segments for our development. However, no assurances can be given that
additional acquisitions will be consummated, and if consummated, that they will
generate increased revenues or net income for us.
Development of New Franchise Concepts. We are actively engaged in the
development of new franchised food concepts involving product offerings which
will not be directly competitive with the products offered by the chain of
Blimpie outlets.
Maui Tacos(TM) - In October 1997 we acquired a majority interest in MTII,
a concept featuring a health-oriented, affordable restaurant-quality menu of
"Maui-Mex" items, including traditional Mexican foods marinated in Hawaiian
spices. Our intention in acquiring the trademarks and development rights for
Maui Tacos is to convert the pre-existing Maui Tacos full service restaurant
concept with six locations operating in Hawaii into a quick service restaurant
concept. We intend to accomplish that goal by awarding development rights to
subfranchisors and master licensors across the United States and
internationally. As of June 30, 1999, five subfranchise territories have been
awarded in the United States. The first company-owned restaurant is operating in
Atlanta, with leases signed on three other locations in New York, North
Carolina, and Delaware.
Pasta Central(TM) - This company-created concept features baked pasta and
pizza offerings in the HMR (Home Meal Replacement) category that address current
eating trends for eat-in or take home meals. Our strategy for this concept is to
co-brand Pasta Central with Blimpie outlets to create natural synergies and cost
efficiencies. In the typical Blimpie location, the majority of sales take place
at lunch time. We anticipate that Pasta Central will generate significant
evening traffic, since it includes meals for in-store dining, take-away, or for
final preparation and consumption at home. We expect that the two concepts can
co-exist in the same location and generate greater returns to the franchisee and
us based on higher revenues and lower costs as a percentage of these revenues.
The concept may eventually be developed as a stand-alone location. The first
location opened in Missouri in March of 1999, with two subsequent locations
opened in Idaho and Puerto Rico.
Smoothie Island(TM) - This MTII-created concept features offerings of
blended beverages of frozen yogurt, fruit and nutritional supplements. Smoothie
Island will be co-branded with Blimpie and Maui Tacos locations, and may also
stand alone in other venues such as airports, sporting arenas, and fitness
centers. As of June 30, 1999, there were 30 locations open and operating in 17
states and in Puerto Rico. We currently are developing a stand-alone Smoothie
Island Juice Bar location in Houston, Texas which will feature juice drinks,
nutritional supplements, and health-related products for retail sale.
No assurances can be given that we will be able to successfully develop
any or all of these new franchise food concepts. We have incurred substantial
initial costs associated with the development of these new concepts and we will,
in all likelihood, continue to incur substantial costs which will exceed the
initial revenues derived. Furthermore, no assurances can be given that we will
be able to develop sufficient market acceptance and market penetration with
respect to any of the new franchise concepts, or that we will be able to derive
any revenues or net income from such undertakings.
COMPETITION
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We and our franchisees compete in the quick-service restaurant industry,
which is highly competitive with respect to price, service, outlet location and
food quality, and is often affected by changes in consumer tastes, local and
national economic conditions affecting consumer spending habits, population
trends and traffic patterns. We and our franchisees compete with an increasing
number of national chains of quick-service outlets, a number of which have
dominant market positions, and possess substantially greater financial resources
and longer operating histories than we possess.
Our most significant competitor is the Subway(R) chain of sandwich
outlets, whose outlets offer food products substantially similar to those
offered by Blimpie outlets, at comparable prices. We and our franchisees also
compete with regional and local franchised and independently owned outlet
operations, many of which are larger in terms of financial resources and sales
volume, than our chain of franchised outlets and our franchisees, respectively.
Our outlets compete principally on the basis of price, nature of product,
food quality and quality of service. In selling franchises, we compete with a
number of franchisors of outlets and other business concepts. In general, there
is also active competition for management personnel, as well as for attractive
commercial real estate sites suitable for outlets.
We also are required to respond to various consumer preferences, tastes
and eating habits; demographic trends and traffic patterns; increases in food
and labor costs; and national, regional and local economic conditions. In the
past, several quick-service restaurant companies have experienced flat growth
rates and declines in average sales per outlet, in response to which certain of
such companies have adopted "value pricing" strategies. Such strategies could
have the effect of drawing customers away from companies that do not engage in
discount pricing and could also negatively impact the operating margins of
competitors that do attempt to match competitors' price reductions. Continuing
or sustained price discounting in the fast food industry could have an adverse
effect on our business and financial condition.
EMPLOYEES
As of June 30, 1999, we employed 118 full-time employees (including eleven
officers). Twenty-two employees (including six officers) attend to our
franchisee operations support, executive management and legal staffing needs at
our New York City office; 16 employees (including one officer) provide
construction and design and franchisee operations support services at our
Houston, Texas office; and 80 employees (including four officers) are engaged in
accounting, franchisee operations support and training, marketing and franchise
development activities at our Atlanta, Georgia office. In addition, seven of the
employees included above (including one officer) of MTII are engaged in
franchisee operations support, executive management and franchise development
activities in an office adjacent to our Atlanta, Georgia office. None of our
employees is covered by collective bargaining agreements. All of our full-time
employees, including executive officers, are covered by a health plan and our
401(k) profit sharing plan.
We consider our employee relations to be good. We believe that we provide
working conditions and pay salaries and bonuses that compare favorably with
those of our competitors.
We have adopted a stock incentive plan for our employees and officers. See
"Executive Compensation - Omnibus Stock Incentive Plan."
ITEM 2. PROPERTIES
Our principal office is located at 740 Broadway, New York, New York, where
we lease, through a wholly-owned subsidiary, 740 Broadway Top Floor Corp.,
approximately 6,000 square feet of office space from an unaffiliated landlord.
We have guaranteed the obligations of our subsidiary under that lease. Our
subsidiary pays a monthly rent of $9,200 which is subject to escalations, plus
certain utilities and other fees. The term of the lease expires in February,
2003. We also lease 18,710 square feet of office space in Atlanta, Georgia from
an unaffiliated landlord, through our wholly owned subsidiary Blimpie Capital
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Corporation. The monthly payments under this lease currently approximate $21,439
and escalate to $23,777 per month during the last year of the lease term in
2003.
We also sublease 3,585 square feet of office space in Houston, Texas, on a
month-to-month basis pursuant to an oral agreement with Vet Con Management
Company, Inc. ("Vet Con"), a company wholly owned by Joseph Conza. Vet Con holds
the lease relating to such office space with a landlord unaffiliated with us. We
make monthly payments under such sublease directly to the landlord. The monthly
payments under such sublease made by us are currently $3,954 and, if we continue
to occupy the premises pursuant to our oral sublease, may escalate to include
annual common area maintenance payments during the final three years of the
lease term, which may require moderate increased payments to the landlord for
expenses incurred by the landlord in maintaining common areas.
We also own a building and are the lessee of a ground lease relating to
property in Marietta, Georgia. The building was purchased by us in 1984 for
$80,855 and is currently subleased to a Blimpie franchisee for use as a Blimpie
outlet. There is no mortgage on that building.
Each franchisee is required to lease the outlet premises from one of our
wholly owned leasing subsidiaries. Each leasing subsidiary leases such premises
from a landlord unaffiliated with us. See "Business - Outlet Properties."
ITEM 3. LEGAL PROCEEDINGS
An arbitration proceeding was commenced in August 1999 in the Southfield,
Michigan office of the AAA entitled Trafalgar Holdings, LLC, et al v. Blimpie
International, Inc. (case no. 54 114 00384 99). The claimants seek compensatory
damages in excess of $350,000 based upon allegations of common law fraud and
violations of the Michigan Franchise Investment Law arising from alleged
misrepresentations and omissions attributed to our subfranchisor for the
Northern Michigan area in connection with the sale of Blimpie franchises to the
claimants, claims for breach of fiduciary duty by us and an accounting in
connection with our administration of the advertising cooperative to which the
claimants belonged and a claim for breach of contract by us relating to the
claimants' alleged plan to open additional franchises at six month intervals. We
have denied all liability, and are vigorously defending all of these claims.
An arbitration proceeding was commenced in February 1998 in the San
Francisco, California office of the AAA entitled Peacox Ventures LLC v Blimpie
International, Inc. (case no. 74-114-0209-98). The claim alleges violations of
the California Franchise Investment Law, the California Unfair Practices Act,
fraud and negligent misrepresentation based on alleged misrepresentations and
omissions in the sale of franchises by our subfranchisor, who is alleged to be
our agent, as well as a claim for breach of contract based on our alleged
failure to provide operational support and assistance to the claimant. The
demand seeks rescission of claimant's franchise agreements, restitution of
monies spent by the claimant and consequential damages amounting to
approximately $737,000 and injunctive relief. A decision in favor of the
claimant in the amount of approximately $200,000, plus expenses to be borne by
us in the amount of approximately $15,000 was rendered in October, 1999. We
accrued a charge for the payment we must make pursuant to the arbitrator's
decision in our audited financial statements for the year ended June 30, 1999.
An arbitration proceeding was commenced in March 1999 in the New York, New
York office of the AAA entitled B.A.E. Enterprises, Inc., et al v Blimpie
International, Inc. The claimants, who formerly operated a Blimpie franchise in
Harris, Texas, allege we violated the Texas Deceptive Trade Practices Act, and
committed fraud and breach of contract based upon alleged misrepresentations and
omissions in the sale of their franchise. Claimants allege that they suffered
damages in the amount of $100,000 (which they are seeking to treble under the
Texas Deceptive Trade Practices Act). A hearing, at which we denied all
liability and vigorously defended our position, was held with respect to the
claim in late September 1999. As of the date of this report, no decision has
been issued.
An arbitration proceeding was commenced in November 1998 in the New York,
New York office of the AAA entitled Mohinder Parkash and Satish Walia v Blimpie
International, Inc. (case no.
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131140120698). The claimants, who formerly operated a Blimpie outlet in
Waterford, Michigan, claim that we breached our franchise agreement with them by
opening another Blimpie outlet within two miles of their outlet, and by failing
to assist the claimants with operational and financial problems. The claimants
have demanded damages in excess of $450,000, plus attorneys fees and costs. A
three day hearing, at which we denied all liability and vigorously defended our
position, was held in October 1999. A fourth day of hearings has been scheduled
in December 1999.
It is the opinion of management that the liability, if any, arising from
all pending claims and lawsuits will not have a material adverse impact upon our
consolidated earnings, financial position or cash flows.
Item 3a. Our Executive Officers
The following table sets forth certain information concerning all of our
executive officers. Executive officers are elected by the Board of Directors to
serve at the pleasure of the Board.
Name Age Position
- ---- --- --------
Anthony P. Conza 59 President and Chief Executive Officer
David L. Siegel 55 Chief Operating Officer and General Counsel
Patrick J. Pompeo 60 Executive Vice President, Research and Development
Charles G. Leaness 49 Executive Vice President - Senior Corporate
Counsel and Secretary, Chief Executive Officer,
Maui Tacos International, Inc.
Joseph A. Conza 45 Senior Vice President, President - B I Concept
Systems, Inc.
Robert S. Sitkoff 46 Senior Vice President, President - Maui Tacos
International, Inc.
Joseph W. Morgan 37 Senior Vice President, President - Blimpie Subs &
Salads
Brian D. Lane 37 Vice President, Chief Financial Officer
Mr. Anthony P. Conza, together with two individuals who are not affiliated
with us, originally created the Blimpie concept in 1964. He is one of the
original founders of the Blimpie outlet chain, and is one of our co-founders. He
has been Chairman of our Board of Directors, and our President and Chief
Executive Officer since we commenced business operations in 1977. In 1992, the
"Entrepreneur of the Year" for New York, an award sponsored by Ernst & Young,
Merrill Lynch and Inc. Magazine, was presented to Mr. Conza. In the same year,
he was also named Chain Operator of the Year by the New York State Restaurant
Association. He is a member of the Board of the Jose Limon Dance Company, a
member of the Board of Governors of The Boys & Girls Clubs of America and he
serves on the Dean's Council at Harvard University's JFK School of Government.
Mr. Conza is the brother of Joseph A. Conza, the brother-in-law of Patrick
Pompeo and the father-in-law of Joseph Morgan.
Mr. Siegel, one of our co-founders, served as our Executive Vice President
and General Counsel and as a member of our Board of Directors since our
formation in 1977. In September 1995, he was appointed as our Vice Chairman of
the Board, Chief Operating Officer and General Counsel. He also served as our
Treasurer from 1977 until January, 1991. He is also a practicing attorney in the
City of New York. Mr. Siegel received a Bachelor of Arts degree in 1965 from
Marietta College, a Juris Doctor Degree in 1968 from New York University School
of Law and a Master of Laws Degree in 1970 from New York University School of
Law. During the past five years, Mr. Siegel has also served as an officer of
each of our leasing subsidiaries.
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Mr. Pompeo has served as a director and Senior Vice President in charge of
operations since the time of commencement of our business operations in 1977. In
September 1995, he became Executive Vice President of Research Development and
Procurement. Mr. Pompeo was employed for 16 years as a floor supervisor by E.F.
Hutton & Co., the former New York Stock Exchange member firm. Mr. Pompeo is also
a principal shareholder, officer and director of Georgia Enterprises, Inc., our
Subfranchisor for the State of Georgia. Mr. Pompeo is the brother-in-law of
Anthony Conza.
Mr. Leaness has been a member of our Board of Directors since we commenced
business operations, and served as our Senior Vice President-Corporate Counsel
for more than the past five years. He was appointed Chief Executive Officer of
Maui Tacos International, Inc. in February 1999. In September, 1995, he was
appointed as one of our Executive Vice Presidents. Mr. Leaness is also a
principal shareholder, officer and director of Llewellyn Distributors, Inc., our
Blimpie Subfranchisor for a part of New Jersey, and of Manhattan Maui, Inc., our
subfranchisor for Maui Tacos for the County of New York in New York State. Mr.
Leaness received a Bachelor of Arts degree from Tulane University in 1972 and a
Juris Doctor degree from New York Law School in 1982. Mr. Leaness is a
practicing attorney in New York State. He currently serves as Director of the
New York State Restaurant Association and is President of the New York City
Chapter. Mr. Leaness also serves on the Board of Directors of the International
Franchise Association (IFA).
Mr. Joseph A. Conza held the position of Vice President - Construction and
Design from February 1991 through August 1995. In September 1995, he was
appointed Senior Vice President - Equipment and Design Services. In November
1997, he was appointed President of B I Concept Systems, Inc., our wholly-owned
equipment and design subsidiary. From 1986 through his appointment as one of our
Vice Presidents, Mr. Conza was employed as President of Lone Star Blimpie, Inc.
He has also served as President of International Southwest Blimpie, Inc. since
1990. Mr. Conza is also a principal shareholder, officer and was director of
International Southwest Blimpie, Inc., our Subfranchisor for the Harris County
(Houston), Texas market through the sale of this market to an unrelated party in
November 1998. Mr. Conza also is a principal shareholder of Georgia Enterprises,
Inc., our Subfranchisor for the State of Georgia. Mr. Conza is the brother of
Anthony P. Conza.
Mr. Sitkoff served as our Vice President, Treasurer and Chief Financial
Officer from January 1991 through August 1995. In September 1995, he was
appointed Senior Vice President, Treasurer and Chief Financial Officer. In
September 1997, he was appointed President of Maui Tacos International, Inc.
Between 1980 and 1985, he was self-employed as a distributor for Pepperidge
Farms' Biscuit Division. Between 1986 and 1988, he was a principal shareholder
and President of Blimpie of Central Florida, Inc., our Subfranchisor for the
Orlando, Florida market. From 1989 through 1990 he was employed as our
Controller. Mr. Sitkoff received a B.S. degree in Industrial Management from
Georgia Institute of Technology in 1974.
Mr. Morgan joined us in 1992 in the capacity as a corporate counsel. From
1994 through August 1995, he served as our director of strategic planning. In
September 1995, he was appointed as Vice President of Strategic Planning and in
December 1996 he was appointed to Senior Vice President of Strategic Planning.
In September 1997 he was appointed President of our Blimpie Subs & Salads
division. During the three year period prior to joining us, Mr. Morgan attended
the University of Miami School of Law, and received a J.D. degree from said
institution in June 1992.
Mr. Lane joined us in May 1998 in the capacity of Vice President, Chief
Financial Officer. After graduating from the University of Georgia in 1984 with
a Bachelor of Business Administration in Accounting, Mr. Lane joined Ernst &
Young LLP as a staff accountant. He progressed to the position of Audit Senior
Manager before leaving the firm in 1995. Mr. Lane then joined Checkmate
Electronics, Inc., an electronics manufacturer in Roswell, Georgia, as Director
of Finance. He was promoted to Vice President of Finance before leaving that
company to join us.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of our security holders during the
fourth quarter of our fiscal year ended June 30, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock traded on the Nasdaq National Stock Market through March
16, 1998. On March 17, 1998, the Common Stock was listed on the American Stock
Exchange under the symbol BLM. The quarter by quarter ranges of the high, low
and closing prices of our Common Stock on these markets during the fiscal years
ended June 30, 1998 and 1999 were as follows:
Quarter-End High Low Close
----------- ---- --- -----
9/97 5.500 4.500 4.625
12/97 5.500 3.188 3.438
3/98 4.438 3.500 4.438
6/98 4.375 3.000 3.063
9/98 3.938 1.750 2.250
12/98 2.625 2.000 2.188
3/99 2.750 2.000 2.438
6/99 3.063 1.938 2.750
As of November 15, 1999, there were 546 holders of record of our Common
Stock.
We paid our first cash dividends on our Common Stock in the amount of
$.025 per share during the fiscal year ended June 30, 1993 ($.017 per share as
adjusted for a 3:2 stock split effected during the fiscal year ended June 30,
1994 (the "1994 Stock Split"). During the fiscal years ended June 30, 1995,
1996, 1997, 1998 and 1999 we paid cash dividends aggregating $.05 $.06, $.07,
$.07 and $.07 per share, respectively. It is our present intention to pay
dividends in or about October and April of each year, subject to such factors as
earnings levels, anticipated capital requirements, our operating and financial
condition and other factors deemed relevant by the Board of Directors.
During the fiscal years ended June 30, 1997, 1998 and 1999, we did not
sell any securities which were not registered under the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------
(Dollars in 000's, Except Per Share and Outlets Open Data)
<S> <C> <C> <C> <C> <C>
Revenues (a) $ 33,550 $ 37,107 $ 37,337 $ 34,235 $ 25,887
Continuing Fees 18,956 17,343 15,391 12,465 8,734
Income before cumulative effect of change
in accounting principle 1,156 2,444 3,278 4,040 2,340
Cumulative effect adjustment (3,373) -- -- -- --
Net (loss) income (2,217) 2,444 3,278 4,040 2,340
Basic earnings per share before cumulative
effect adjustment $ 0.12 $ 0.26 $ 0.34 $ 0.43 $ 0.27
Diluted earnings per share before cumulative
effect adjustment $ 0.12 $ 0.26 $ 0.34 $ 0.41 $ 0.27
Basic (loss) earnings per share $ (0.23) $ 0.26 $ 0.34 $ 0.43 $ 0.27
Diluted (loss) earnings per share $ (0.23) $ 0.26 $ 0.34 $ 0.41 $ 0.27
Pro forma amounts assuming the new revenue
recognition method is
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
applied retroactively (b):
Net income $ 1,156 $ 2,428 $ 2,816 $ 2,940 $ 1,790
Basic earnings per share $ 0.12 $ 0.25 $ 0.30 $ 0.31 $ 0.21
Diluted earnings per share $ 0.12 $ 0.25 $ 0.29 $ 0.30 $ 0.21
Total assets $ 28,258 $ 28,323 $ 27,704 $ 21,823 $ 15,252
Long term debt -- -- -- 5 13
Long term trademark obligations 204 3,408 3,509 -- --
Total shareholders' equity 18,107 20,625 18,865 15,675 7,308
Cash dividends declared per
common share $ 0.07 $ 0.07 $ 0.07 $ 0.06 $ 0.05
Outlets open at end of year 2,097 1,972 1,684 1,407 986
</TABLE>
- ---------------------
(a) Results for fiscal 1998, 1997, 1996 and 1995 have been adjusted to
reflect a reclassification of certain management fees from Management fees and
other income to Selling, general and administrative expenses.
(b) Pro Forma amounts assuming the new revenue recognition method is
applied retroactively are unaudited for fiscal 1998, 1997, 1996 and 1995
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-looking Statements
The following discussion contains certain forward-looking statements
subject to the safe harbor created by the Private Securities Litigation Reform
Act of 1995. These statements use such words as "may," "will," "expect,"
"believe," "plan" "anticipate" and other similar terminology. These statements
reflect management's current expectations and involve a number of risks and
uncertainties. Actual results could differ materially due to changes in: global
and local business and economic conditions; legislation and governmental
regulation; competition; success of operating initiatives and advertising and
promotional efforts; food, labor and other operating costs; availability and
cost of land and construction; adoption of new or changes in accounting policies
and practices; consumer preferences, spending patterns and demographic trends;
political or economic instability in local markets; and currency exchange rates.
Overview
We have centered our operations around the Blimpie Subs & Salads chain of
quick service restaurants. We and our subfranchisors have more than doubled the
number of operating restaurants over the past four years, increasing from 986
restaurants at June 30, 1995 to 2,097 restaurants at June 30, 1999. Continuing
fees based upon each franchisee's gross sales have increased 117.0% in the same
time period, increasing from $8.7 million in fiscal 1995 to $19.0 million in
fiscal 1999. In fiscal 1996, we achieved record profitability by generating over
$4 million in net income and $0.41 per diluted share. Despite the continued
increases in the number of restaurants and in continuing fees, our profitability
declined in each year subsequent to 1996 due primarily to a decrease in revenues
from the sale of subfranchise territories and fewer new outlet openings.
Generally, we pay our subfranchisors approximately half of the continuing
fees and franchise fees we receive, and we realize a low gross margin on
equipment sales. Sales of subfranchises and master licenses are our most
profitable sources of revenue, since the only direct expense for such sales is
commissions and trademark license fees of approximately 24% of the related
revenues. During fiscal 1996, we recognized over $3.1 million in subfranchise
and master license fees, but this amount declined to $2.3 million in fiscal 1997
and $1.4 million in fiscal 1998. Since most of the available domestic Blimpie
subfranchise territories had been sold, we began focusing on the international
market beginning in fiscal 1996. Sales of master license territories were strong
in fiscal 1997, but decreased in fiscal 1998 and fiscal 1999 as we focused on
assisting our existing Master Licensors in developing their territories. While
we believe that the international marketplace represents a vast potential for
growth, there are many barriers to success in this arena, and no assurances can
be given that we will be successful in our attempt to develop outside of the
United States.
Faced with declining profitability despite the consistent growth in the
number of Blimpie outlets and continuing fees, we began to develop several new
initiatives, the most notable of which was the introduction of three new brands.
During fiscal 1998, we restructured our management personnel in order to provide
better support to our subfranchisors and franchisees in the Blimpie Subs &
Salads Group, as well as to allow others to focus on building new franchise
opportunities. We believe that we can continue to improve our Blimpie Subs &
Salads operations while using our franchising expertise to introduce new
franchise concepts that complement the Blimpie brand. The development of new
franchise concepts is an expensive endeavor. We have incurred additional
expenses in fiscal 1998 and fiscal 1999 relating to these efforts, and will
continue to incur similar costs in fiscal 2000 and beyond.
We believe that our three new concepts, Maui Tacos(TM), Pasta Central(TM),
and Smoothie Island(TM), will be well received and that the Blimpie brand will
continue to be successful. Looking forward, we anticipate that fiscal 2000 will
include many changes in our operations. We are already operating the first Maui
Tacos store, and we expect to generate store sales and store costs associated
with the operation of that store as well as future Company-owned outlets. In
addition, all three new concepts are expected to generate new revenues in fiscal
2000, and to continue to increase selling, general and administrative expenses
through additional personnel, legal and advertising costs necessary to support
these initiatives.
21
<PAGE>
No assurance can be given that the introduction of these concepts will result in
increased revenues, or that such revenues, if received, will exceed the related
costs.
Results Of Operations
Fiscal Year Ended June 30, 1999 Compared With Fiscal Year Ended June 30, 1998.
Prior to July 1, 1998, we recognized fees relating to subfranchisor and
master licensor territory sales when collected or due. If fees were collectible
over an extended period and no reasonable basis existed for estimating
collectibility, we recognized those fees as we collected them or when the
uncertainty regarding collectibility was resolved. Effective July 1, 1998, we
changed our methodology of accounting for fees relating to subfranchisor and
master licensor territory sales to recognize such fees as revenue on a straight
- - line basis over a 10 year period. We estimate that 10 - years is approximately
the period over which our performance obligation to the subfranchisor and master
licensor extends. We consider the new revenue recognition methodology to result
in a better matching of revenues and related expenses we incur in the earnings
process related to such revenues. The effect of the change in fiscal 1999 was to
increase income before the cumulative effect adjustment by approximately
$274,000 ($0.03 per share). The adjustment of $3,373,000 (after reduction for
income taxes of $1,815,000) to apply retroactively the new method is included in
the net loss in fiscal 1999.
Our income before cumulative effect of change in accounting principle
decreased 52.7% to $1,156,000 in fiscal 1999 from $2,444,000 in fiscal 1998. Our
basic and diluted earnings per share before cumulative effect of change in
accounting principle decreased 53.8% to $0.12 per share in fiscal 1999 from
$0.26 per share in fiscal 1998. Such decreases are attributable primarily to
decreases in subfranchise, master license and franchise fees and equipment
sales, and an increase in selling, general and administrative expenses, all of
which are discussed below.
Our continuing fees derived from franchises increased 9.3% to $18,956,000
in fiscal 1999 from $17,343,000 in fiscal 1998. This increase was due primarily
to the 6.3% increase in the number of open outlets from 1,972 at June 30, 1998
to 2,097 at June 30, 1999. Continuing fees increased at a faster rate than the
rate of outlet openings primarily because a large number of low volume outlets
closed during the year.
22
<PAGE>
Subfranchisor fees, master license fees and fees from the sales and
resales of franchises decreased 10.7% to $4,451,000 in fiscal 1999 from
$4,983,000 in fiscal 1998. The following table summarizes the components of
these fees for fiscal 1999 and 1998:
<TABLE>
<CAPTION>
Year Ended June 30,
(amounts in 000's) 1999 1998 Change
----------------------------------
<S> <C> <C> <C>
Subfranchisor fees $ -0- $ 791 n/a
Master license fees -0- 575 n/a
Amortization of deferred subfranchise
and master license fees 1,170 -0- n/a
Franchise fees 2,713 3,169 -14.4%
Resale fees 568 448 26.8%
----------------------------------
Total $ 4,451 $ 4,983 -10.7%
==================================
Deferred subfranchise and master license
fees (assuming retroactive change in
accounting policy) $ 4,745 $ 5,188 -8.5%
==================================
</TABLE>
In fiscal 1999, we changed our accounting policy relating to subfranchise
and master license fees. The fiscal 1998 amounts presented above are based on
the previous policy, and the fiscal 1999 amounts are based on the new policy. If
the new policy was in place in fiscal 1998, amortization of deferred
subfranchise and master license fees would have been $1,119,000 in fiscal 1998
as compared to $1,170,000 in fiscal 1999, or an increase of 4.6% in fiscal 1999.
During fiscal 1999, we granted development rights for five Maui Tacos
subfranchise territories and two international Blimpie territories. In fiscal
1998, we granted development rights for 4 international Blimpie territories. In
fiscal 1999, the amortization of these fees was greater than the fees generated
by new development grants, so the deferred revenue balance decreased 8.5% during
the year. Revenues from sales of franchises decreased 14.4% in fiscal 1999 due
primarily to a 36.3% decrease in new outlets opened, from 454 new outlets in
fiscal 1998 to 289 new outlets in fiscal 1999. The lower decrease in revenues as
compared to outlets opened is due to a higher average franchise fee for
locations opened, as well as revenues recognized for outlets sold more than two
years ago, but not opened as of June 30, 1999. Resale fees increased 26.8% in
fiscal 1999 due primarily to more outlets and subfranchise territories being
transferred to new owners.
As of June 30, 1999, we had Master Licensors operating in 27 countries,
and 57 Blimpie outlets operating in 13 of these countries. Our focus in 2000
will be to continue to sell new international territories while assisting our
Master Licensors with the aggressive development of the existing areas. Although
we have strengthened our infrastructure and created an international department
to support international expansion, the international market has not developed
as rapidly as expected with regard to master license fees and outlet openings.
No assurances can be given that our investment in the international marketplace
will increase either franchise grants, master license fees or outlet openings,
or if such increases do occur, that they will result in material increments in
revenue.
Store equipment sales decreased 35.1% to $9,328,000 in fiscal 1999 from
$14,374,000 in fiscal 1998. This decrease was consistent with the 36.3% decrease
in new outlets opened in the two years. The decrease in sales to Blimpie
franchisees was partially offset by an increase in sales to non-affiliates. In
fiscal 1998, we expanded BI Concept Systems in order to sell equipment to
franchisees of other chains. Outside sales approximated 9.6% of equipment sales
in fiscal 1999, up from 3.0% in fiscal 1998. We believe this expansion will
continue to increase the percentage of outside sales; however, no assurances can
be given that this expansion will generate any additional revenue or net income.
License fees and other income for the year ended June 30, 1999 increased
17.2% to $477,000 from $407,000 in fiscal 1998. This increase was due to greater
license fees from the sale of Blimpie branded products, as well as royalties
from the Canteen Vending Service Program.
In October 1998, we opened the first mainland Maui Tacos location in
Atlanta, Georgia. The location is owned and operated by a subsidiary of ours,
and currently is the only outlet operated by us.
23
<PAGE>
Company restaurant sales were $338,000 for the portion of fiscal 1999 that the
outlet was in operation. We intend to continue to open and operate a limited
number of Company-owned outlets for Maui Tacos and possibly for co-branded
Blimpie / Pasta Central / Smoothie Island locations.
The Subfranchisors' shares of continuing and franchise fees increased 5.3%
to $11,782,000 in fiscal 1999 from $11,188,000 in fiscal 1998. The most
significant portion of this expense is the subfranchisor's share of continuing
fees, which generally is 50% of the fees we collect. The overall increase in
this expense was due primarily to the 9.3% increase in continuing fees. Another
component of this expense is the subfranchisor's share of franchise and resale
fees. This share generally amounts to between 40% and 60% of the franchise fee
for new franchises and between 30% and 50% of the resale fees collected. Due to
the overall decrease in franchise and resale fees, this portion of the total
expense decreased in fiscal 1999 from fiscal 1998. The final component of this
expense is the trademark license fee paid to MBI. See "Business - Trademarks,
Trade Names, Service Marks and Logos; Know-How and Methods of Operation." MBI
receives a fee on Blimpie Subs & Salads revenues earned in all international
markets and certain domestic markets, which consist of all or a portion of 13
states in which we had open franchises as of June 30, 1999. Generally, the fee
earned by MBI is 30% of the amount received by us, net of direct costs,
including amounts paid to subfranchisors and master licensors and the cost of
equipment. The trademark license fees earned by MBI decreased to $778,000 in
fiscal 1999 from $837,000 in fiscal 1998 due primarily to the decrease in
Blimpie franchise, master license and subfranchise fees collected.
Store equipment cost of sales decreased 33.3% to $8,137,000 in fiscal 1999
from $12,192,000 in fiscal 1998. This decrease was due to the 35.1% decrease in
store equipment sales, combined with a decline in the profit margin on the
sales. The gross margin on store equipment sales decreased to 12.8% in fiscal
1999 from 15.2% in fiscal 1998 due to price increases received from
manufacturers which were not fully passed on to customers.
Selling, general and administrative expense rose 14.2% to $12,156,000 in
fiscal 1999 from $10,649,000 in fiscal 1998. This increase was due primarily to
additional personnel and related costs associated with the growth in number of
Blimpie outlets, as well as personnel, legal and other costs incurred in the
development of the Maui Tacos, Smoothie Island and Pasta Central brands.
Additionally, we incurred higher professional fees related to changing to a
different subfranchisor and master license fee revenue recognition method,
increased our allowance for doubtful accounts and wrote off certain deferred
franchise fees and start-up costs during fiscal 1999. We believe that the number
of Blimpie outlets will continue to increase and the new brands will continue to
require increased support as franchises and/or subfranchise territories are
sold. However, we also believe the additional fiscal 1999 expenses noted above
will not be incurred again in fiscal 2000. Therefore, we expect selling, general
and administrative expenses will decrease in fiscal 2000, but no assurance can
be made that such decrease will be realized.
Company restaurant operations were $342,000 in fiscal 1999, with no
comparable expense in fiscal 1998. The first Company-owned outlet was opened in
October 1998. Through June 30, 1999, restaurant operating expenses exceeded
restaurant sales due primarily to high food costs associated with testing
alternative product sources and preparation methods. Operating results for the
outlet have improved consistently through the year, and we believe that the
outlet will be profitable in fiscal 2000. However, no assurances can be made
that the outlet will be profitable or will remain in operation in the coming
year.
Interest income in fiscal 1999 decreased by 2.7% to $823,000 from $846,000
in fiscal 1998. This decrease was the result of the selling of a portion of the
U.S. Treasury notes we owned in February 1999 in order to satisfy the remaining
obligation from the purchase of the international trademarks and service marks
in February 1997. See "Business - Trademarks, Trade Names, Service Marks and
Logos; Know-How and Methods of Operation."
24
<PAGE>
The effective income tax rates (income taxes expressed as a percentage of
pre-tax income) were 40.9%, excluding the impact of the change in accounting
principle, in fiscal 1999 and 37.7% in fiscal 1998. The increase in fiscal 1999
was due to certain losses of our subsidiary, Maui Tacos International, Inc.,
which are not deductible for tax purposes in fiscal 1999.
Fiscal Year Ended June 30, 1998 Compared With Fiscal Year Ended June 30, 1997.
Our net income decreased 25.4% to $2,444,000 in fiscal 1998 from
$3,278,000 in fiscal 1997. Our basic and diluted earnings per share decreased
23.5% to $0.26 per share in fiscal 1998 from $0.34 per share in fiscal 1997.
Such decreases are attributable primarily to decreases in subfranchise, master
license and franchise fees, and an increase in selling, general and
administrative expenses, all of which are discussed below.
Our continuing fees derived from franchises increased 12.7% to $17,343,000
in fiscal 1998 from $15,391,000 in fiscal 1997. This increase was due to the
17.1% increase in the number of open outlets from 1,684 at June 30, 1997 to
1,972 at June 30, 1998. Continuing fees increased at a slower rate than the rate
of outlet openings primarily because a greater percentage of the new outlets
were "new concept" outlets which have lower average unit volumes than
traditional outlets. New concept outlets include those located in convenience
stores, institutional food service facilities, colleges, schools, mass feeders,
hospitals, bowling alleys, golf courses and subway stations.
Subfranchisor fees, master license fees and fees from the sales and
resales of franchises decreased 23.5% to $4,983,000 in fiscal 1998 from
$6,516,000 in fiscal 1997. The following table summarizes the components of
these fees for fiscal 1998 and 1997:
Year Ended June 30,
(amounts in 000's) 1998 1997 Change
----------------------------
Subfranchisor fees $ 791 $ 969 -18.4%
Master license fees 575 1,368 -58.0%
Franchise and resale fees 3,617 4,179 -13.4%
============================
Total $4,983 $6,516 -23.5%
============================
Subfranchise fees decreased 18.4% due to fewer expansions of existing
territories and lower deferred subfranchise fees recognized in fiscal 1998
compared to fiscal 1997. Master license fees decreased 58.0% from fiscal 1997 to
fiscal 1998. In fiscal 1997, we granted development rights for 17 international
territories, including 16 countries and the Canadian province of Ontario. In
fiscal 1998, we granted development rights for four international territories,
including Panama, Portugal, Puerto Rico and the Canadian province of Manitoba.
This reduction in the number of master licenses sold was due to a shift in focus
from selling new territories to helping existing Master Licensors to develop
their respective territories. Revenues from sales of franchises and resale fees
decreased 13.4% in fiscal 1998 due primarily to a greater percentage of the new
outlets being "new concept" outlets, which generally have a lower franchise fee
per outlet. The number of new outlets opened increased 6.6% to 454 new outlets
in fiscal 1998 from 426 in fiscal 1997.
As of June 30, 1998, we had Master Licensors operating in 26 countries,
and 37 Blimpie outlets operating in 12 of these countries. Our focus in 1999
will be to continue to sell new international territories while assisting our
Master Licensors with the aggressive development of the existing areas. Although
we have strengthened our infrastructure and created an international department
to support international expansion, the international market has not developed
as rapidly as expected with regard to master license fees and outlet openings.
No assurances can be given that our investment in the international marketplace
will increase either franchise grants, master license fees or outlet openings,
or if such increases do occur, that they will result in material increments in
revenue.
Store equipment sales decreased 3.8% to $14,374,000 in fiscal 1998 from
$14,935,000 in fiscal 1997. This slight decrease was due to a greater percentage
of the new franchises being "new concept"
25
<PAGE>
franchises, which typically purchase less equipment than traditional locations.
The decrease in sales to Blimpie franchises was partially offset by an increase
in sales to non-affiliates. In fiscal 1998, we expanded our equipment sales
department in Houston in order to sell equipment to franchisees of other chains.
For that year, such activities accounted for 3.0% of total equipment sales. We
believe this expansion will continue to increase revenue and in turn net income,
however no assurances can be given that this expansion will generate any
additional revenue or net income.
License fees and other income for the year ended June 30, 1998 decreased
17.8% to $407,000 from $495,000 in fiscal 1997. This decrease resulted primarily
from lower management fees from franchisees relating to services provided to the
advertising associations.
The Subfranchisors' shares of continuing and franchise fees increased 4.6%
to $11,188,000 in fiscal 1998 from $10,692,000 in fiscal 1997. The most
significant portion of this expense is the subfranchisor's share of continuing
fees, which generally is 50% of the fees we collect. The overall increase in
this expense was due primarily to the 12.7% increase in continuing fees. Another
component of this expense is the subfranchisor's share of franchise and resale
fees. This share generally amounts to between 40% and 60% of the franchise fee
for new franchises and between 30% and 50% of the resale fees collected. Due to
the overall decrease in franchise and resale fees, this portion of the total
expense decreased in fiscal 1998 from fiscal 1997. The final component of this
expense is the trademark license fee paid to MBI. See "Business - Trademarks,
Trade Names, Service Marks and Logos; Know-How and Methods of Operation." MBI
receives a fee on revenues earned in all international markets and certain
domestic markets, which consisted of all or a portion of 13 states in which we
had open franchises as of June 30, 1998. Generally, the fee earned by MBI is 30%
of the amount received by us, net of direct costs, including amounts paid to
subfranchisors and master licensors and the cost of equipment. The trademark
license fees earned by MBI decreased to $837,000 in fiscal 1998 from $968,000 in
fiscal 1997 due primarily to the decrease in master license and subfranchise
fees. In fiscal 1997, a trademark license fee totaling $134,000 also was paid to
Anthony P. Conza, our Chairman and Chief Executive Officer, and David L. Siegel,
our Vice Chairman and Chief Operating Officer, amounting to 30% of all
international revenues, net of direct expenses. This trademark license fee was
discontinued in February 1997, when we acquired the international trademark
rights owned by these individuals.
Store equipment cost of sales decreased 6.4% to $12,192,000 in fiscal 1998
from $13,024,000 in fiscal 1997. This decrease was due to the 3.8% decrease in
store equipment sales, combined with an improvement in the profit margin on the
sales. The gross margin on store equipment sales increased to 15.2% in fiscal
1998 from 12.8% in fiscal 1997 due to a small price increase in fiscal 1998 and
a favorable product mix.
Selling, general and administrative expense rose 15.5% to $10,649,000 in
fiscal 1998 from $9,218,000 in fiscal 1997. This increase was due primarily to
additional personnel and related costs associated with the 17.1% growth in
number of Blimpie outlets, as well as personnel, legal and other costs incurred
in the development of the Maui Tacos, Smoothie Island and Pasta Central brands.
Management believes that the number of Blimpie outlets will continue to increase
and the new brands will continue to require increased support as franchises
and/or subfranchise territories are sold. Therefore, management expects selling,
general and administrative expenses will continue to increase for at least the
next year.
Interest income in fiscal 1998 decreased by 4.9% to $846,000 from $890,000
in fiscal 1997. This decrease was the result of the selling of a portion of the
U.S. Treasury notes we owned to purchase a portion of the international
trademarks and service marks in February 1997. See "Business - Trademarks, Trade
Names, Service Marks and Logos; Know-How and Methods of Operation."
The effective income tax rates (income taxes expressed as a percentage of
pre-tax income) were 37.7% in fiscal 1998 and 38.1% in fiscal 1997. The slight
decrease was due to a lower effective state tax rate.
Liquidity And Capital Resources
26
<PAGE>
During fiscal years 1999, 1998 and 1997 we did not incur any material
capital commitments. As of June 30, 1999, our working capital was $9,587,000 and
total cash and investments were $10,959,000.
We generated cash flows from operating activities of $3,217,000,
$2,090,000 and $1,919,000 in the fiscal years ended June 30, 1999, 1998 and
1997, respectively. The increase in fiscal 1999 was primarily the result of a
smaller increase in accounts receivable and an increase in accounts payable and
accrued expenses, and was partially offset by decreases in income taxes payable
and deferred revenues and lower income before cumulative effect of change in
accounting principle. The increase in fiscal 1998 as compared to fiscal 1997 was
due to collections on notes receivable, a decrease in income taxes payable,
lower prepaid expenses and other assets and higher depreciation, partially
offset by lower net income, an increase in accounts receivable, and a decrease
in accounts payable and accrued expenses.
Net cash used in investing activities during fiscal 1999, 1998 and 1997
totaled $1,868,000, $688,000, and $2,096,000, respectively. The greater use of
cash in fiscal 1999 and fiscal 1997 when compared to fiscal 1998 was due to
payments made for international trademark rights.
Net cash used in financing activities during fiscal 1999, 1998 and 1997
totaled $688,000, $913,000, and $619,000, respectively. The decrease in the use
of cash from 1998 to 1999 was due to lower purchases of treasury stock in 1999,
and to collections on subscriptions receivable. The increase in the use of cash
from fiscal 1997 to fiscal 1998 was due to the implementation of a plan we
announced in fiscal 1998 to repurchase up to 250,000 shares of our Common Stock.
As of June 30, 1999 we had repurchased 133,000 shares pursuant to this plan.
Currently, the time period allotted for the stock repurchase plan has expired,
and we do not intend to repurchase additional shares. However, we may implement
a new stock repurchase program and continue the repurchase of our Common Stock.
Our primary liquidity needs arise from expansion, capital expenditures and
trademark obligations. These needs are primarily met by the cash flows from
operations and from our cash and investments. We believe that our cash flows
from operations and our cash and investments will be sufficient to fund our
liquidity needs for the foreseeable future.
Impact of Year 2000
Our business and our relationships with our business partners and
customers depend significantly on a number of computer software programs,
internal operating systems and connections to other networks. The failure of any
of these programs, systems or networks to successfully address the Year 2000
data rollover problem could have a material adverse effect on our business,
financial condition and results of operations. Many installed computer software
and network processing systems currently accept only two-digit entries in the
date code field and may need to be upgraded or replaced in order to accurately
record and process information and transactions on and after January 1, 2000.
We utilize personal computers that are connected to a network for all of
our employee workstations. These personal computers all utilize Microsoft
Windows NT as their operating system. We believe that the Windows NT operating
system is Year 2000 compliant. Additionally, we recently installed new software
to operate all of our accounting operations. We believe this new software, and
the computer hardware on which it runs, to be Year 2000 compliant. We anticipate
that all accounting operations will be performed using Year 2000 compliant
software before December 31, 1999. The majority of the costs of installing and
implementing the aforementioned software and hardware was incurred prior to June
30, 1999. We anticipate that any additional expenditures to complete the
implementation will be funded from cash flow generated by operations.
We do business primarily with our subfranchisors and franchisees, who in
turn deal with retail customers and food distribution companies. We have
considered the transactions we conduct with our subfranchisors and franchisees
in our analyses of the Year 2000 issue, and believe that we have completed
substantially all modifications to the computer systems used in these
transactions to ensure the systems are Year 2000 compliant. We are not certain
whether the computer software and business systems of our franchisees' suppliers
are Year 2000 compliant. The failure or delay of these distributors to
27
<PAGE>
successfully address the Year 2000 issue may result in delays in placing or
receiving orders for goods and services at the store level. Such delays may
result in lost revenues for the franchisees, and in turn, lower continuing fee
revenue for us. We anticipate that such delays and lost revenues, if any, would
be minimal.
We intend to continue to monitor our Year 2000 compliance and to correct
any noncompliance as it is discovered. We anticipate funding such efforts out of
operating cash flow. We believe that the effects of any noncompliance on our
part, or by our customers and suppliers, will not have a material adverse effect
on our business, financial condition, results of operations or cash flows.
28
<PAGE>
Item 8. FINANCIAL STATEMENTS
Our financial statements described below and the reports of independent
auditors thereon are set forth following the Index of Financial Statements on
page F-1 of this report:
Reports of independent auditors
Consolidated balance sheets at June 30, 1999 and 1998
Consolidated statements of operations and comprehensive (loss) income for
each of the three years in the period ended June 30, 1999
Consolidated statements of shareholders' equity for each of the three
years in the period ended June 30, 1999
Consolidated statements of cash flows for each of the three years in the
period ended June 30, 1999
Notes to consolidated financial statements
Report of independent auditors on financial statement schedule
Consolidated schedule of valuation and qualifying accounts
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
At a meeting of the Audit Committee of our Board on October 30, 1998, the
committee approved the engagement of Ernst & Young LLP as our independent
auditors for the fiscal year ending June 30, 1999 to replace the firm of
PricewaterhouseCoopers LLP, who were dismissed as our auditors effective
November 3, 1998.
The reports issued by PricewaterhouseCoopers LLP with respect to its
audits of our financial statements for the fiscal years ended June 30, 1997 and
1998 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope, or accounting principles.
During our fiscal years ended June 30, 1997 and 1998, and the interim
period which commenced on July 1, 1998 and ended on the date of dismissal of
PricewaterhouseCoopers LLP, there were no disagreements with
PricewaterhouseCoopers LLP on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures which, if not
resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused
PricewaterhouseCoopers LLP to make reference thereto in any report issued or to
be issued by it in connection with its audit of our financial statements.
29
<PAGE>
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS
Information regarding all of our executive officers and employee-directors
is included in Part I at Item 3a. Following is information regarding all of our
non-employee directors.
Alvin Katz, Age 68
Mr. Katz was appointed to our Board of Directors on November 23, 1993. Mr.
Katz has been a member since September 1993 of the Board of Directors of Nastech
Pharmaceutical Company, Inc., a company engaged in the development of
pharmaceuticals. Since 1981, he has served as an adjunct professor of business
management at Florida Atlantic University. In 1991, Mr. Katz was appointed Chief
Executive Officer of Odessa Engineering Corp., a company engaged in the
manufacturing of pollution monitoring equipment. He held this position until
that company was sold in September 1992. Mr. Katz also serves on the Board of
Directors of Amtech Systems Inc. which is engaged in the manufacture of capital
equipment in the chip manufacturing business; and serves as Chairman of the
Board of Ozo Diversified Automation, Inc., a manufacturer of driller and
depaneling machines for circuit board manufacturers. Mr. Katz holds a B.S. in
Business Administration degree from New York University and has done graduate
work at C.U.N.Y.-Baruch School.
Harry G. Chernoff, Age 52
Dr. Chernoff was appointed to our Board of Directors on November 23, 1993.
For more than the past five years, Dr. Chernoff has been a principal of HMS
Properties, Inc., a real estate investment, development and management firm. Dr.
Chernoff has an active financial and operational consulting practice with major
financial institutions, and food and hospitality firms as his clients. Dr.
Chernoff received a Ph.D. in Operations Management from the New York University
Leonard N. Stern School of Business in 1985, and has been a member of the
faculty of New York University for 20 years. He also received a B.S. degree from
New York University in 1968 and an M.S. degree from that institution in 1975.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth compensation awarded to, earned by or paid
to our Chief Executive Officer and our four highest-paid executive officers who
served as such at June 30, 1999 and whose annual compensation and bonus was
$100,000 or more (collectively, the "Named Executive Officers"). Information
with respect to salary, bonus, other annual compensation, restricted stock and
options is included for the fiscal years ended June 30, 1999, 1998 and 1997. We
have not paid any compensation
30
<PAGE>
that would qualify as "Restricted Stock Awards," payouts pursuant to long-term
incentive plans ("LTIP Payouts"), or "All Other Compensation" in any of the
three years in the period ended June 30, 1999.
<TABLE>
<CAPTION>
Long Term
Compen-
Annual Compensation sation
--------------------------------------- -----------
Fiscal Other Securities All
Year Annual Underlying Other
Name and Ended Compen- Options/ Compen-
Principal Position June 30 Salary($) Bonus ($) sation SARs(#) sation
------------------ ------- --------- --------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Anthony P. Conza,
Chairman & CEO 1999 $235,330 $ 30,736 $ 919(1) 25,000 $ 2,715(3)
1998 217,375 41,006 1,172(1) -- --
1997 214,326 117,450 3,093(1) 40,000 --
David L. Siegel,
Vice Chairman & COO 1999 174,297 15,498 919(1) 25,000 1,914(3)
1998 156,748 21,558 1,172(1) -- --
1997 149,418 58,725 3,093(1) 40,000 --
Charles G. Leaness,
Exec. V.P 1999 141,250 8,391 3,399(1) 25,000 1,922(3)
1998 124,028 14,521 4,397(1) -- --
1997 114,654 39,233 10,982(1) 20,000 --
Patrick J. Pompeo,
Exec. V.P 1999 138,971 9,891 919(1) 25,000 2,000(3)
1998 115,615 14,521 1,172(1) -- --
1997 102,181 39,233 3,093(1) 20,000 --
Joseph W. Morgan,
Sr. V.P., President - 1999 136,437 6,856 919(1,2) 35,000 1,828(3)
Blimpie Subs & Salads 1998 114,654 10,451 3,938(1,2) -- --
and Pasta Central 1997 92,413 14,166 10,827(1,2) 25,000 --
</TABLE>
(1) Represents commissions paid with respect to master license sales
consummated.
(2) Reflects the fair market value on the date of grant of shares of our
Common Stock granted to Mr. Morgan of $2,766 in 1998 and $7,734 in 1997.
(3) Represents matching contributions which we made to our 401(k) Plan on
behalf of each of the Named Executive Officers.
Options/SAR Grants In Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
Number of Potential Realizable Value
Securities % of Total at Assumed Annual Rates of
Underlying Options Stock Price Appreciation
Options Granted to Exercise or for Option Term
Granted Employees in Base Price Expiration --------------------------
Name (#) Fiscal Year ($/Sh) Date 5 ($) 10 ($)
---- --- ----------- ------ ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Anthony P. Conza 25,000 4.9% $3.03 6/30/08 $ 96,657 $122,033
David L. Siegel 25,000 4.9% 3.03 6/30/08 96,657 122,033
Charles G. Leaness 25,000 4.9% 3.03 6/30/08 96,657 122,033
Patrick J. Pompeo 25,000 4.9% 3.03 6/30/08 96,657 122,033
Joseph W. Morgan 35,000 6.9% 3.03 6/30/08 135,320 170,847
</TABLE>
31
<PAGE>
Fiscal Year End Option Values
The following table sets forth the number of unexercised options held
by our Named Executive Officers during the fiscal year ended June 30, 1999. No
options were exercised during such period.
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End(#) at FY-End($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable Unexercisable
---- -------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Anthony P. Conza -- -- 34,000/31,000 $ -- / --
David L. Siegel -- -- 34,000/31,000 -- / --
Charles G. Leaness -- -- 22,000/23,000 -- / --
Patrick J. Pompeo -- -- 22,000/23,000 -- / --
Joseph W. Morgan -- -- 54,000/131,000 1,563 /6,250
</TABLE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the holdings of our Common Stock as of
November 15, 1999 by (1) each person or entity known to us to be the beneficial
owner of more than five percent (5%) of the outstanding shares of our Common
Stock; (2) each director and executive officer; and (3) all directors and
executive officers as a group. All of the holders of our Common Stock are
entitled to one vote per share.
<TABLE>
<CAPTION>
Number of Shares Percent
Name and Address of Beneficial Owner (1) Beneficially Owned (2) Owned (3)
---------------------------------------- ---------------------- ---------
<S> <C> <C>
Anthony P. Conza ......................... 2,979,308 (4) 31.3%
David L. Siegel .......................... 1,516,615 (5) 16.0%
Charles G. Leaness ....................... 455,065 (6) 4.8%
Patrick Pompeo ........................... 421,020 (7) 4.4%
Alvin L. Katz (8) ........................ 6,800 (9) *
Harry G. Chernoff (10) ................... 9,068 (11) *
Joseph W. Morgan ......................... 188,683 (12) 2.0%
All Directors and Executive Officers
As a Group (12 Persons) .................. 5,709,365 (13) 58.7%
</TABLE>
- ----------
* Represents less than 1%.
(1) Except as otherwise noted, the address of each of the persons listed below
is 740 Broadway, New York, New York 10003.
(2) Includes shares actually and beneficially owned.
(3) Based upon 9,470,926 shares outstanding on November 15, 1999 (not
including 133,000 treasury shares), increased by the number of shares
under options which the holder(s) thereof have the right to acquire within
60 days from November 15, 1999.
(4) Includes 34,000 shares which Mr. Conza may acquire pursuant to options
exercisable within 60 days of November 15, 1999. Does not include (a)
37,050 shares owned by Mr. Conza's daughter, (b) 9,300 shares owned by Mr.
Morgan (Mr. Conza's son-in-law), (c) 125,000 shares owned jointly by Mr.
Conza's daughter and Mr. Morgan over which Mr. Morgan has sole voting
power, (d) 4,150 shares owned by Mr. Conza's parents, (e) 44,913 shares
owned by Joseph Conza, the brother of Mr. Conza,
32
<PAGE>
and (f) 44,000 shares held by Mr. Conza's daughter as Trustee for the
Anthony P. Conza Charitable Remainder Trust, as to all of which Mr. Conza
disclaims beneficial ownership.
(5) Includes 34,000 shares which Mr. Siegel may acquire pursuant to options
exercisable within 60 days of November 15, 1999. Does not include 13,046
shares held by Mr. Siegel's daughter, as to which Mr. Siegel disclaims
beneficial ownership.
(6) Includes 22,000 shares which Mr. Leaness may acquire pursuant to options
exercisable within 60 days of November 15, 1999.
(7) Includes 22,000 shares which Mr. Pompeo may acquire pursuant to options
exercisable within 60 days of November 15, 1999. Does not include 6,300
shares held by Mr. Pompeo's sister and brother-in-law, as to which Mr.
Pompeo disclaims beneficial ownership.
(8) The address of Mr. Katz is 301 N. Birch Road, Ft. Lauderdale, Florida
33304.
(9) Includes 3,400 shares which Mr. Katz may acquire pursuant to options
exercisable within 60 days of November 15, 1999.
(10) The address of Mr. Chernoff is 286 Spring Street, Suite 401, New York, New
York 10013.
(11) Includes 3,400 shares which Dr. Chernoff may acquire pursuant to options
exercisable within 60 days of November 15, 1999.
(12) Includes 54,000 shares which Mr. Morgan may acquire pursuant to options
exercisable within 60 days of November 15, 1999. Does not include (a)
37,050 shares held by Mr. Morgan's wife (Mr. A. Conza's daughter), (b)
13,100 shares held by Mr. Morgan's children, (c) 700 shares held by Mr.
Morgan's wife as custodian for his son under the Transfers to Minors Act,
(d) 44,000 shares held by Mr. Morgan's wife as Trustee for the Anthony P.
Conza Charitable Remainder Trust, and (e) 16,500 shares held by a
corporation of which Mr. Morgan's wife is the sole shareholder, as to all
of which Mr. Morgan disclaims beneficial ownership.
(13) Includes 245,300 shares which all of such persons may acquire pursuant to
options exercisable within 60 days of November 15, 1999. Does not include
the shares excluded from the percentage ownership calculations made with
respect to Messrs. Conza, Siegel, Pompeo and Morgan pursuant to notes 4,
5, 7 and 12 above.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal years ended June 30, 1999, 1998 and 1997, we paid
$1,155,000, $1,149,000, and $984,000, respectively, to Georgia Enterprises, Inc.
("Georgia Enterprises"), a corporation partially owned by Patrick Pompeo, one of
our Executive Vice Presidents and directors, and Joseph Conza, one of our Senior
Vice Presidents and President of B I Concept Systems, Inc., in payment of the
fees that Georgia Enterprises earned as the Subfranchisor for the Georgia
market. During the same three fiscal years, we paid $305,000, $281,000, and
$289,000, respectively, to Llewellyn Distributors, Inc. ('Llewellyn"), a
corporation partially owned by Charles G. Leaness, one of our directors and
Executive Vice Presidents, who also serves as CEO of Maui Tacos International,
Inc., in payment of Llewellyn's share of the fees that it earned as the
Subfranchisor for the northern New Jersey market. We also paid $53,000,
$146,000, and $150,000, respectively, to International Southwest Blimpie, Inc.
('Southwest'), a corporation principally owned and controlled by Joseph Conza
until its sale to an unrelated third party in November 1998, in payment of said
corporation's share of the fees that it earned as the Subfranchisor for the
Houston, Texas market.
Each of the aforementioned transactions was effected pursuant to written
agreements between us and the parties thereto. Such agreements are substantially
identical to the standard form of subfranchise
33
<PAGE>
agreement that we enter into with unaffiliated subfranchisors. In the opinion of
our management, each such agreement is on terms as favorable to us as would be
available from an unrelated third party.
During the fiscal years ended June 30, 1998, and 1997, we received $4,000
and $168,000, respectively, in reimbursements of expenses from Georgia
Enterprises. Such reimbursements relate to operational and administrative
support functions which we provided to Georgia Enterprises. In fiscal 1998, we
ceased providing these functions, and the related contract was terminated.
During the years ended June 30, 1999, 1998 and 1997, we paid $11,000,
$11,000 and $7,000, respectively, to Joseph Conza as compensation for the use of
his apartment in New York City by employees of our Atlanta and Houston offices
during business trips. In our estimation, this practice reduced our lodging
expense inasmuch as the per diem amounts paid to Mr. Conza were below the market
rates for hotel accommodations which we would have been required to pay in order
to house such employees during such trips to New York.
During the fiscal years ended June 30, 1999, 1998 and 1997, we received
$110,000, $119,000 and $101,000, respectively, in reimbursements of expenses
from Llewellyn. Such amounts were paid pursuant to a written agreement which
provides that we shall be reimbursed by Llewellyn for costs incurred by us in
providing operational support services to Llewellyn. The agreement also provides
that in the event the costs of such support services shall rise, then the fees
paid pursuant to the agreement shall rise accordingly. In the opinion of our
management, the agreement is on terms as favorable to us as would be available
from an unrelated third party.
During the fiscal years ended June 30, 1998 and 1997, we received $8,000
and $49,000, respectively, in reimbursements of expenses from Southwest. Such
reimbursements relate to operational and administrative support functions which
we provided to Southwest. In fiscal 1998, we ceased providing these functions,
and the related contract was terminated.
In April 1994, Mr. Leaness borrowed the sum of $20,000 from us, and
collateralized the payment thereof with the same 120,000 shares of Common Stock
which he pledged in connection with a $60,000 option exercise and loan
transaction consummated in December 1991. This $20,000 loan is payable upon
demand and bears interest at the rate of 5% per annum.
In March 1995, Joseph Conza borrowed the principal amount of $55,500 from
us. That indebtedness is payable in constant bi-monthly payments of principal
and interest computed at the rate of 8% per annum on the basis of a 20 year
amortization schedule, and the unpaid balance of principal and accrued but
unpaid interest shall become due and payable on April 16, 2000, provided,
however, that, Mr. Conza may extend the term of the loan through April 15, 2015
as long as no default exists with regard to the loan when it originally matures.
Mr. Conza pledged 10,000 unregistered shares of our Common Stock as collateral
security for the payment of all sums due under the loan. As of the end of the
fiscal year, Mr. Conza was current with respect to his payment obligations and
the outstanding principal balance had been reduced to $49,806.
In 1997, we acquired the rights possessed by Anthony P. Conza and David L.
Siegel regarding the licensing of the Blimpie trademarks and the Blimpie
Marketing System for all non-U.S. territories, pursuant to a 99 year license
Agreement. That agreement provided for payment of certain income-based fees to
Messrs. Conza and Siegel, and further provided for cancellation by them if we
failed to pay them a minimum annual fee aggregating $350,000 during the first
five years of the term, and a minimum aggregate fee of $150,000 per year
(subject to an annual cost of living adjustment) during the balance of such
term. The payments made to Messrs. Conza and Siegel under this agreement were
$137,029 during the fiscal year ended June 30, 1997. In February 1997, we
acquired, pursuant to a written agreement which we executed with Messrs. Conza
and Siegel, ownership of the undivided 60% interest in the international rights
to the Blimpie trademarks and Blimpie Marketing System owned by them. In
accordance with that agreement, we paid $3 million to Mr. Conza and $1.5 million
to Mr. Siegel. The agreement also provided that Messrs. Conza and Siegel could
receive annual payments totaling $150,000 per year for 50 years, or could elect,
at any time prior to January 1, 2001, to receive a lump sum
34
<PAGE>
distribution of $3 million on January 1, 2001, with $2 million payable to Mr.
Conza and $1 million payable to Mr. Siegel. In February 1999, both of Messrs.
Conza and Siegel elected to receive the lump-sum payment. They also agreed to
terminate the 99-year license of the domestic rights to the Blimpie trademarks
that they had granted to us in 1976, and contributed those rights to us. In
consideration for the contribution of these trademark rights and in satisfaction
of the lump-sum payment due in 2001, we amended the 1997 international trademark
agreement, and paid the full $3 million payment in February 1999.
35
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial statements:
Consolidated financial statements filed as part of this report are
listed under Part II, Item 8 of this Form 10-K.
2. Financial statement schedule:
The financial statement schedule filed as part of this report is
listed under Part II, Item 8 of this Form 10-K.
3. Exhibits:
The exhibits listed in the accompanying index are filed as part of
this report.
Exhibit
Number Description
- ------ -----------
3.1 Certificate of Incorporation, as Amended*
3.2 By-laws *
4.1 Specimen stock certificate of common stock*
10.1 Trademark Agreement dated as of August 1, 1976 among Peter DeCarlo,
Anthony P. Conza and David L. Siegel*
10.2 Modification Agreement dated as of November 15, 1977 by and among
Peter DeCarlo, Anthony P. Conza and David L. Siegel*
10.3 Agreement dated as of June 15, 1981 by and between Peter DeCarlo,
Anthony P. Conza and David L. Siegel*
10.4 Agreement dated as of June 1, 1977 by and between Anthony P. Conza
and David L. Siegel and International Blimpie Corporation*
10.5 Agreement dated as of December 15, 1980 by and between International
Blimpie of Illinois, Inc. and International Blimpie Corporation*
10.6 Trademark Distribution Agreement dated July 18, 1984 by and between
International Blimpie Corporation and ISM, Inc. and Anthony P.
Conza, Peter DeCarlo and David Siegel*
10.7 Agreement dated April 30, 1992 by and between Astor Restaurant
Group, Inc. and Blimpie of California, Inc. and ISM, Inc.*
10.8 Replacement Subfranchise Agreement dated as of October 17, 1991 by
and between Astor Restaurant Group, Inc. and Patrick J. Pompeo and
Joseph Conza*
10.9 Agreement dated July 19, 1991 by and between Metropolitan Blimpie,
Inc. and Astor Restaurant Group, Inc.*
10.10 Area Distributor's Agreement dated October 6, 1976 between
International Blimpie Corporation and Jeffrey P. Wiener and Charles
Leaness*
36
<PAGE>
10.11 Subfranchise Agreement dated April 1, 1984 by and between
International Blimpie Corporation and Joseph P. Conza*
10.12 Lease dated as of December 2, 1987 by and between First Capital
Income Properties, Ltd. - Series IX and Blimpie Capital Corporation
and Lease Modification Agreement dated November 1, 1989 and Second
Lease Modification Agreement dated August 21, 1991 between the
parties thereto*
10.13 Service Agreement dated as of August 1, 1992 between the Company and
Mellon Securities Trust Company*
10.14 Option, Loan, and Pledge Agreements and Promissory note dated as of
December 20, 1991 between Astor Restaurant Group, Inc. and Patrick
J. Pompeo*
10.15 Option, Loan and Pledge Agreements and Promissory Note dated as of
December 20, 1991 between Astor Restaurant Group, Inc. and David L.
Siegel*
10.16 Option, Loan and Pledge Agreements and Promissory Note dated as of
December 20, 1991 between Astor Restaurant Group, Inc. and Charles
G. Leaness*
10.17 Option, Loan and Pledge Agreements and Promissory Note dated as of
December 20, 1991 between Astor Restaurant Group, Inc. and Anthony
P. Conza*
10.18 Agreement dated as of January 31, 1992 by and between Astor
Restaurant Group, Inc. and Barber & Bronson, Inc.*
10.19 Blimpie Retirement Plan 401(k) Profit Sharing Plan*
10.20 Copy of the Company's Group Life, Accident and Health Insurance
Policy*
10.21 Agreement dated December 18, 1991 between Astor Restaurant Group,
Inc. and Llewellyn Distributors, Inc.*
10.22 Agreement dated March 1, 1992 between Blimpie International, Inc.
and International Southwest Blimpie, Inc.*
10.23 Agreement dated March 1, 1992 between Blimpie International, Inc.
and Blimpie of Atlanta, Inc.*
10.24 1993 Stock Incentive Plan*
10.25 Form of Option Issuable Under the 1993 Stock Incentive Plan*
10.26 Standard Form of Franchise Agreement*
10.27 Standard Form of Subfranchise Agreement*
10.28 Agreement dated June 13, 1991 by and between International Blimpie
Co., an unincorporated division of Astor Restaurant Group, Inc. and
Blimpie Fifty-Seven, Inc.*
10.29 Form of indemnity agreement between the Company and its directors
and/or officers*
10.30 Standard Form of Sublease Agreement*
37
<PAGE>
10.31 Lease dated February 18, 1993 between Lafayette Astor Associates and
740 Broadway Top Floor Corp. and Guaranty of Blimpie International,
Inc. with respect thereto*
10.32 Fourth Lease Modification Agreement dated April 27, 1994 between
First Capital Income Properties, Ltd., - Series IX and Blimpie
Capital Corporation*
10.33 Agreement dated July 19, 1993 by and between Marc Haskell, Andrew
Whitman, Riaz Baksh and The Border Cafe, Inc. and Blimpie
International, Inc.*
10.34 Agreement dated May 24, 1993 by and between Metropolitan Blimpie,
Inc., Anthony P. Conza, David L. Siegel and Blimpie International,
Inc.*
10.35 Equipment Lease Agreement dated January 24, 1992 by and between
Rapid Leasing International, Inc. and Consal Enterprises, Inc.*
10.36 License Agreement dated July 19, 1993 between The Border Cafe, Inc.
and Blimpie International, Inc.*
10.37 Promissory Note, Note Addendum and Pledge Agreement dated March 24,
1995 between Joseph Conza and the Company*
10.38 Form of Warrant Issued to Non-Employee Directors*
10.39 Warrant dated February 12, 1993 Issued to Barber & Bronson
Incorporated*
10.40 Option dated September 15, 1994 Issued to Kirschenbaum & Bond, Inc.*
10.41 Financial Consulting Agreement by and between Barber & Bronson
Incorporated and Blimpie International, Inc. (a copy of which was
filed with the Commission on July 19, 1995 as Exhibit 10.41 to
Amendment No. 1 to the Company's Registration Statement on Form SB-2
(Reg. No. 33-93738), and is hereby incorporated herein by this
reference).
10.42 International Trademark Licensing Agreement among Anthony P. Conza,
David L. Siegel and the Company*
10.43 Agreement made as of the 18th day of February, 1997 by and between
Anthony P. Conza, David L. Siegel and Blimpie International, Inc.**
10.44 Amendment agreement made as of the 3rd day of February, 1999 by and
between Anthony P. Conza, David L. Siegel, and Blimpie
International, Inc.***
10.45 Form of basic Maui Tacos Franchise Agreement
10.46 Form of basic Maui Tacos Subfranchise Agreement
10.47 Form of basic Pasta Central Franchise Agreement
10.48 Form of basic Pasta Central Subfranchise Agreement
10.49 Form of basic Smoothie Island Franchise Agreement
18 Letter dated December 13, 1999 from Ernst & Young LLP regarding
change in accounting principle related to subfranchise and master
license fee revenues
21 Subsidiaries of the Company*
38
<PAGE>
The following document has been filed as an Exhibit solely with the
Securities and Exchange Commission:
23.1 Consent of Independent Auditors
23.2 Consent of Independent Auditors
27 Financial Data Schedule
- ----------
* (a copy of which was filed with the Commission on June 30, 1995 as an Exhibit
of corresponding number to the Company's Registration Statement on Form SB-2
(Reg. No. 33-93738), and is hereby incorporated herein by this reference).
** (a copy of which was filed with the Commission on May 12, 1997 as an Exhibit
of corresponding number to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1997, and is hereby incorporated herein by this
reference).
*** (a copy of which was filed with the Commission on February 12, 1999 as an
Exhibit of corresponding number to the Company's Current Report on Form 8-K
dated February 10, 1999, and is hereby incorporated herein by this reference).
(b) Reports on Form 8-K:
The Company did not file any Current Reports on Form 8-K during the fourth
quarter of its fiscal year ended June 30, 1999.
39
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
BLIMPIE INTERNATIONAL, INC.
Dated: December 13, 1999 By: /s/ Anthony P. Conza
--------------------------------------
Anthony P. Conza, Chairman
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Principal Executive Officer
Date: December 13, 1999 /s/ Anthony P. Conza
------------------------------------------
Anthony P. Conza, Chairman and Chief
Executive Officer
Principal Financial And Accounting Officer
Date: December 13, 1999 /s/ Brian D. Lane
------------------------------------------
Brian D. Lane, Vice President, Chief
Financial Officer
Date: December 13, 1999 /s/ David L. Siegel
------------------------------------------
David L. Siegel, Vice Chairman, Chief
Operating Officer and General Counsel
Date: December 13, 1999 /s/ Patrick J. Pompeo
------------------------------------------
Patrick J. Pompeo, Executive Vice
President and Director
Date: December 13, 1999 /s/ Charles G. Leaness
------------------------------------------
Charles G. Leaness, Executive Vice
President, Secretary and Director
Date: December 13, 1999 /s/ Alvin Katz
------------------------------------------
Alvin Katz, Director
Date: December 13, 1999 /s/ Harry G. Chernoff
------------------------------------------
Harry G. Chernoff, Director
40
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Auditors F-2
Consolidated Balance Sheets at June 30, 1999 and 1998 F-4
Consolidated Statements of Operations and Comprehensive (Loss)
Income for each of the three years in the period ended June 30, 1999 F-5
Consolidated Statements of Shareholders' Equity for each of the
three years in the period ended June 30, 1999 F-6
Consolidated Statements of Cash Flows for each of the three
years in the period ended June 30, 1999 F-7
Notes to Consolidated Financial Statements F-8
Report of Independent Auditors on Financial Statement Schedule F-27
Consolidated Schedule of Valuation and Qualifying Accounts for each
of the three years in the period ended June 30, 1999 F-28
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Blimpie International, Inc.
We have audited the accompanying consolidated balance sheet of Blimpie
International, Inc. and subsidiaries as of June 30, 1999, and the related
consolidated statements of operations and comprehensive (loss) income,
shareholders' equity, and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Blimpie
International, Inc. and subsidiaries at June 30, 1999, and the consolidated
results of their operations and their cash flows for the year ended June 30,
1999, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 1999 the
Company changed its method of accounting for subfranchisor and master license
fee revenues.
/s/ Ernst & Young LLP
Atlanta, Georgia
December 3, 1999
F-2
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
Blimpie International, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and comprehensive (loss) income, of
shareholders' equity, and of cash flows present fairly, in all material
respects, the financial position of Blimpie International, Inc. and Subsidiaries
at June 30, 1998, and the results of their operations and their cash flows for
each of the two years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
August 17, 1998
F-3
<PAGE>
Blimpie International, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except for per share amounts)
- --------------------------------------------------------------------------------
June 30
Assets 1999 1998
- --------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 4,682 $ 4,021
Investments 5,296 4,495
Accounts receivable, less allowance of $392 in 1999
and $207 in 1998 3,106 3,058
Prepaid expenses and other current assets 206 498
Income taxes receivable 22 --
Deferred income taxes 85 --
Current portion of notes receivable 427 569
-------- --------
Total current assets 13,824 12,641
Property and equipment - at cost less accumulated
depreciation of $1,776 in 1999 and $1,262 in 1998 1,749 1,584
Other assets:
Notes receivable, less allowance of $81 in 1999
and $65 in 1998 and less current portion 1,009 1,273
Investments 981 3,686
Trademarks - at cost, less accumulated amortization
of $739 in 1999 and $437 in 1998 8,434 8,568
Deferred income taxes 1,828 112
Other 433 360
-------- --------
Total other assets 12,685 13,999
-------- --------
$ 28,258 $ 28,224
======== ========
- --------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- --------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 3,691 $ 2,718
Customer equipment deposits 546 342
Income taxes payable -- 276
Deferred income taxes -- 119
-------- --------
Total current liabilities 4,237 3,455
Deferred revenue, net 5,710 736
Trademark obligations 204 3,408
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 9,604,000 in 1999
and 9,574,000 in 1998 96 96
Additional paid-in capital 8,818 8,420
Retained earnings 9,640 12,519
Net unrealized gain on marketable securities 40 51
-------- --------
18,594 21,086
Treasury stock at cost - 133,000 shares in 1999 and
66,000 shares in 1998 (427) (251)
Subscriptions receivable (60) (210)
-------- --------
Total shareholders' equity 18,107 20,625
-------- --------
$ 28,258 $ 28,224
======== ========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Blimpie International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
<TABLE>
<CAPTION>
(in thousands except for per share amounts)
- ----------------------------------------------------------------------------------------------------
Years Ended June 30
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Continuing fees $ 18,956 $ 17,343 $ 15,391
Subfranchisor fees, master license fees
and sale of franchises 4,451 4,983 6,516
Store equipment sales 9,328 14,374 14,935
License fees and other income 477 407 495
Company restaurant sales 338 -- --
-------- -------- --------
33,550 37,107 37,337
Expenses:
Subfranchisors' share of franchise and continuing fees 11,782 11,188 10,692
Store equipment cost of sales 8,137 12,192 13,024
Selling, general and administrative expenses 12,156 10,649 9,218
Company restaurant operations 342 -- --
-------- -------- --------
32,417 34,029 32,934
-------- -------- --------
Operating income 1,133 3,078 4,403
Interest income 823 846 890
-------- -------- --------
Income before income taxes and cumulative effect
of change in accounting principle 1,956 3,924 5,293
Income taxes on income before cumulative effect
of change in accounting principle 800 1,480 2,015
-------- -------- --------
Income before cumulative effect of change in accounting principle 1,156 2,444 3,278
Cumulative effect on prior years (to June 30, 1998) of changing to
a different subfranchisor and master license fee revenue
recognition method (less tax benefit of $1,815) - Note 2 (3,373) -- --
-------- -------- --------
Net (loss) income $ (2,217) $ 2,444 $ 3,278
======== ======== ========
Basic and diluted earnings (loss) per share:
Income before cumulative effect of change in accounting principle $ 0.12 $ 0.26 $ 0.34
Cumulative effect of change in accounting principle (0.35) -- --
-------- -------- --------
Net (loss) income $ (0.23) $ 0.26 $ 0.34
======== ======== ========
Pro forma amounts assuming the new revenue recognition
method is applied retroactively (1998 and 1997 amounts are
unaudited):
Net income $ 1,156 $ 2,428 $ 2,816
Basic earnings per share $ 0.12 $ 0.25 $ 0.30
Diluted earnings per share $ 0.12 $ 0.25 $ 0.29
Weighted average basic shares outstanding 9,467 9,533 9,517
======== ======== ========
Weighted average diluted shares outstanding 9,472 9,549 9,761
======== ======== ========
Comprehensive (loss) income:
Net (loss) income $ (2,217) $ 2,444 $ 3,278
Other comprehensive (loss) income:
Unrealized (losses) gains on marketable securities:
Unrealized (losses) and gains, net of tax (12) 25 48
Less: reclassification adjustment for (gains) losses
included in net (loss) income, net of tax 1 -- (18)
-------- -------- --------
Other comprehensive (loss) income (11) 25 30
-------- -------- --------
Comprehensive (loss) income $ (2,228) $ 2,469 $ 3,308
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Blimpie International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended June 30, 1999, 1998, and 1997
(in thousands except for per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock
--------------------- Additional Unrealized
Shares Paid-In Retained Holding
Outstanding Amount Capital Earnings Gain (Loss) Total
----------- ------ ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance - July 1, 1996 9,481 $ 95 $ 7,704 $ 8,132 $ (4) $ 15,927
Incentive stock granted/stock options exercised 20 267 267
Stock issued under Canadian trademark agreement 25 239 239
Dividends paid ($ .07 per share) (666) (666)
Net income 3,278 3,278
Net unrealized gain on marketable securities 30 30
---------- ------- -------- -------- --------- --------
Balance - June 30, 1997 9,526 95 8,210 10,744 26 19,075
Incentive stock granted/stock options exercised 23 1 109 110
Stock issued under Canadian trademark agreement 25 101 101
Dividends paid ($ .07 per share) (669) (669)
Net income 2,444 2,444
Net unrealized gain on marketable securities 25 25
---------- ------- -------- -------- --------- --------
Balance - June 30, 1998 9,574 96 8,420 12,519 51 21,086
Incentive stock granted/stock options exercised 5 14 14
Stock issued under Canadian trademark agreement 25 204 204
Warrants and options issued for services and trademark 180 180
Dividends paid ($ .07 per share) (662) (662)
Net loss (2,217) (2,217)
Net unrealized loss on marketable securities (11) (11)
---------- ------- -------- -------- --------- --------
Balance - June 30, 1999 9,604 $ 96 $ 8,818 $ 9,640 $ 40 $ 18,594
========== ======= ======== ======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Blimpie International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands except for per share amounts)
- -------------------------------------------------------------------------------------------------
Years Ended June 30
1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Income before cumulative effect of change in accounting principle $ 1,156 $ 2,444 $ 3,278
Adjustments to reconcile income before accounting change
to net cash provided by operating activities:
Depreciation and amortization 846 706 441
Incentive stock granted 104 98 255
Changes in operating assets and liabilities:
Accounts receivable (48) (973) (629)
Prepaid expenses and other current assets 292 204 (27)
Other assets (99) 118 (228)
Income taxes receivable (22) -- --
Deferred income taxes (105) (32) (115)
Notes receivable 406 663 (474)
Accounts payable and accrued expenses 973 (1,159) 328
Customer equipment deposits 204 342 --
Income taxes payable (276) 268 (556)
Deferred revenue, net (214) (589) (354)
------- ------- -------
Net cash provided by operating activities 3,217 2,090 1,919
Cash Flows from Investing Activities
Purchases of available-for-sale securities (2,646) (4,573) (5,322)
Proceeds from sales of available-for-sale securities 4,605 4,832 8,463
Reinvested dividends of available-for-sale securities (66) (75) (5)
Purchase of international trademarks (3,077) (147) (4,646)
Proceeds from sale of property and equipment -- -- 14
Purchases of property and equipment (684) (725) (600)
------- ------- -------
Net cash used in investing activities (1,868) (688) (2,096)
Cash Flows from Financing Activities
Purchases of treasury stock (176) (251) --
Proceeds from stock warrants/options exercised -- 12 12
Collections on officers' notes receivable for stock purchase 150 -- 42
Cash dividends paid (662) (669) (666)
Repayment of long term debt -- (5) (7)
------- ------- -------
Net cash used in financing activities (688) (913) (619)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 661 489 (796)
Cash and cash equivalents at beginning of year 4,021 3,532 4,328
------- ------- -------
Cash and cash equivalents at end of year $ 4,682 $ 4,021 $ 3,532
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1: Description of Company
Blimpie International, Inc. (the "Company") engages in franchising,
subfranchising and master licensing the Blimpie trademarks, trade names, service
marks, logos, marketing concepts and marketing programs. The Company franchises
BLIMPIE(R) Subs & Salads and Pasta CentralTM and is the majority owner of Maui
Tacos International, Inc. ("Maui Tacos"), the franchisor of Maui TacosTM and
Smoothie IslandTM. BLIMPIE Subs & Salads offers a quick-service, healthy, sub
sandwich in approximately 2,100 franchise stores operating throughout the United
States and in 13 other countries. Pasta Central's baked pasta meals address
current eating trends for eat-in or take home meals. Maui Tacos restaurants
provide a health-oriented, affordable menu of "Maui-Mex" items, including
traditional Mexican foods marinated in Hawaiian spices. Smoothie Island is a
selection of blended beverages of frozen yogurt, fruit and nutritional
supplements sold through the Blimpie, Pasta Central, and Maui Tacos locations.
The Company also provides professional store design services and equipment sales
through its wholly-owned subsidiary, B I Concept Systems, Inc. At June 30, 1999,
the Company operates one Maui Tacos restaurant, and does not operate any
subfranchisor or master licensor areas within the Blimpie International system.
Note 2: Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition and Change in Accounting Principle
Prior to July 1, 1998, the Company recognized fees relating to
subfranchisor and master licensor territory sales when collected or due. If fees
were collectible over an extended period and no reasonable basis existed for
estimating collectibility, those fees were recognized as they were collected or
when the uncertainty regarding collectibility was resolved. Effective July 1,
1998, the Company changed its methodology of accounting for fees relating to
subfranchisor and master licensor territory sales to recognize such fees as
revenue on a straight-line basis over a 10-year period. Such period is estimated
to approximate the period over which the Company's performance obligation to the
subfranchisor and master licensor extends. The Company considers the new revenue
recognition methodology to result in a better matching of revenues and related
expenses incurred in the earnings process related to such revenues. The effect
of the change in fiscal 1999 was to increase income before the cumulative effect
adjustment by approximately $274,000 ($0.03 per share). The cumulative effect
adjustment of $3,373,000 (after reduction for income taxes of $1,815,000) to
apply retroactively the new method is included in the net loss in fiscal 1999.
Initial fees from the awarding of individual franchises are recorded as
revenue when the franchisee's restaurant is opened. Commissions paid and the
subfranchisor's share of the initial fees are deferred and charged to expense
when the initial fees are recognized. Continuing fees from franchised
restaurants are recorded as revenue when earned. Revenue from equipment sales is
recognized when the equipment is shipped.
Cash and Cash Equivalents
The Company considers all short-term debt securities purchased with a
maturity of three months or less to be cash equivalents.
F-8
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 2: Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents (continued)
The Company has cash deposits with financial institutions, which fluctuate
in excess of federally insured limits. If these financial institutions were not
to honor their contractual liability, the Company could incur losses. Management
believes that there is no significant risk of loss because of the financial
strength of the financial institutions.
Investments
Pursuant to Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," debt
securities that may be sold prior to maturity and all marketable equity
securities are classified as available-for-sale and carried at fair value. Fair
value is estimated based on quoted market prices for those or similar
investments. Net unrealized gains and losses, determined on the specific
identification method, on securities classified as available-for-sale are
carried as a separate component of shareholders' equity.
Fair Market Value Disclosure
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS 107), requires disclosure of the fair
value of certain items, including receivables, payables, debt and investments.
The Company believes that the carrying amounts included in the consolidated
balance sheets do not differ significantly from fair value as defined in SFAS
107.
Accounts and Notes Receivable
The Company provides an allowance for doubtful receivables equal to the
estimated collection losses that will be incurred in the collection of such
receivables. The estimated losses are based on historical collection experience
coupled with a review of all outstanding receivables.
Property, Equipment and Depreciation
Property and equipment are carried at cost. Depreciation is computed over
the estimated useful lives of the assets using straight-line methods.
Significant expenditures for additions and improvements are capitalized and
expenditures for routine repairs and maintenance are charged to expense as
incurred.
Trademarks
Trademarks are carried at cost less accumulated amortization, which is
calculated on a straight-line basis over the estimated useful lives of 15-40
years. Amortization expense was $337,000 in 1999, $295,000 in 1998, and $135,000
in 1997.
Advertising
The Company follows the policy of charging the costs of advertising to
expense as incurred. Advertising expense was $404,000 in 1999, $429,000 in 1998,
and $477,000 in 1997.
The Company administers several advertising and promotional funds on
behalf of the franchisees. The franchisees contribute 4% of gross sales to The
National Media Advertising Account. A portion of the 4% contribution is
transferred to Regional Advertising Associations. Franchisees form voluntary
regional advertising associations intended to coordinate advertising and
marketing efforts and programs for local
F-9
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 2: Summary of Significant Accounting Policies (continued)
Advertising (continued)
advertising. Blimpie Brand Building Fund, Inc. is a non-profit entity that is
authorized to receive marketing allowances and payments from purveyors,
distributors and manufacturers. Its activities are controlled by franchisees
elected to the National Blimpie Franchisee Advisory Council, subfranchisors
elected to the National Blimipie Subfranchisor Advisory Council and Company
representatives. The National Media Advertising funds and the Blimpie Brand
Building funds are spent for advertising and marketing uses, including marketing
and advertising personnel, advertising agencies, operating expenses of all
types, matching fund programs, research and development, production of
educational or training materials, production of commercials, focus groups and
other studies, television or radio media time, print advertising and other
marketing and advertising uses.
The Company also administers a grand opening fund and the local
restaurant marketing fund. New franchisees generally pay $3,000 to the grand
opening fund and $2,000 to the local restaurant marketing fund during their
first year of operation. The franchisee, in conjunction with the Company,
develops the marketing plan that will include the grand opening marketing,
coupon events and monthly promotions. As the franchisee implements the marketing
plan, the Company pays vendors or reimburses the franchisee for expenditures
related to that plan up to the amount contributed.
Aggregate receipts and expenditures for these funds were approximately
$13,000,000 each for fiscal 1999. Total assets were approximately $6,000,000 and
total liabilities were approximately $5,000,000 as of June 30, 1999. The net
assets of these funds are held in a manner analogous to escrow accounts by the
Company and are not consolidated.
Income Taxes
The provision for income taxes and corresponding balance sheet accounts
are determined in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS 109). Under SFAS 109, deferred tax
liabilities and assets are determined based on temporary differences between the
basis of certain assets and liabilities for income tax and financial reporting
purposes. A valuation allowance is provided for deferred tax assets for which
realization is uncertain.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
F-10
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 2: Summary of Significant Accounting Policies (continued)
Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
Years Ended June 30
----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ -- $ 3,000 $ 3,000
Income taxes 1,232,000 1,143,000 2,571,000
Noncash investing and financing activities:
Stock issued under Canadian trademark
agreement 204,000 101,000 239,000
Purchase of international trademarks -- -- 3,509,000
Warrants and options issued for services and
trademark 180,000 -- --
Net unrealized (loss) gain on marketable
securities (11,000) 25,000 30,000
</TABLE>
Reclassifications
Certain amounts have been reclassified to conform with the current year
presentation. Primarily, expenses incurred by the Company and reimbursed by an
advertising fund administered by the Company on behalf of franchisees were
reclassified from management fees and other income to selling, general and
administrative expenses. Such reimbursements are reflected as offsets to the
related expenses.
F-11
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 3: Investments
The following is a summary of available-for-sale securities included in
investments as of June 30:
Unrealized Fair
1999 Cost Gain (Loss) Value
----------- ----------- -----------
Available-for-Sale Securities:
Current:
Common stocks $ 61,000 $ 58,000 $ 119,000
Preferred stocks 258,000 (6,000) 252,000
Mutual funds 156,000 (5,000) 151,000
U. S. Government securities 4,765,000 9,000 4,774,000
----------- ----------- -----------
5,240,000 56,000 5,296,000
Long-Term
U. S. Government securities 997,000 (16,000) 981,000
----------- ----------- -----------
$ 6,237,000 $ 40,000 $ 6,277,000
=========== =========== ===========
1998
Available-for-Sale Securities:
Current:
Common stocks $ 61,000 $ 28,000 $ 89,000
Preferred stocks 258,000 3,000 261,000
Mutual funds 149,000 1,000 150,000
U. S. Government securities 3,966,000 29,000 3,995,000
----------- ----------- -----------
4,434,000 61,000 4,495,000
Long-Term
U. S. Government securities 3,696,000 (10,000) 3,686,000
----------- ----------- -----------
$ 8,130,000 $ 51,000 $ 8,181,000
=========== =========== ===========
The long-term U.S. Government securities mature in 2004.
On February 19, 1997, the Company sold held-to-maturity securities with an
aggregate cost of $2,646,000 and realized a gain of $28,000. The proceeds from
the sale were $2,674,000. These securities were sold to acquire the trademark
and marketing system rights as described in Note 9.
At June 30, 1997, United States Treasury notes previously categorized as
being held-to-maturity were recategorized as available-for-sale. Accordingly,
this group of securities has been marked to market with the resulting adjustment
reported in shareholders' equity.
F-12
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 4: Notes Receivable
Notes receivable consist of the following as of June 30:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Notes from subfranchisors, with interest ranging from 5%
to 13% due at various dates through December, 2008 $ 909,000 $ 1,110,000
Notes receivable from sale of discontinued segment due
in weekly installments including interest of 10% per
annum through March, 2000 61,000 67,000
Notes receivable from an officer due in semi-monthly
installments including interest of 8% per annum through
April, 2000 50,000 51,000
Receivable from a leasing company arising from participation
in franchisee equipment leases, with interest ranging from
7% to 17%, due at various dates through June, 2004 497,000 679,000
----------- -----------
1,517,000 1,907,000
Allowance for doubtful accounts (81,000) (65,000)
----------- -----------
1,436,000 1,842,000
Current maturities 427,000 569,000
----------- -----------
$ 1,009,000 $ 1,273,000
=========== ===========
</TABLE>
Note 5: Property and Equipment
The major components of property and equipment and related depreciation
periods as of June 30 are:
Cost
------------------------- Depreciation
Item 1999 1998 Period
- ----------------------------------- ---------- ---------- ------------
Building and other $ 186,000 $ 160,000 7-14 years
Office furniture and fixtures 2,601,000 2,169,000 5-10 years
Automobiles 185,000 185,000 5 years
Software 553,000 332,000 5 years
---------- ----------
3,525,000 2,846,000
Less accumulated depreciation 1,776,000 1,262,000
---------- ----------
$1,749,000 $1,584,000
========== ==========
Depreciation expense totaled $519,000 in 1999, $394,000 in 1998, and
$306,000 in 1997.
Note 6: Trademark Obligations
Trademark obligations consist of the following as of June 30:
1999 1998
---------- ----------
Amount payable to related parties in connection with
acquisition of international trademarks (see Note 9) $ -- $3,000,000
Common shares issuable in connection with
acquisition of Canadian trademark (see Note 9) 204,000 408,000
---------- ----------
$ 204,000 $3,408,000
========== ==========
F-13
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 7: Income Taxes
The provision for income taxes is comprised as follows for the years ended
June 30:
1999 1998 1997
----------- ----------- -----------
Federal
Current $ 789,000 $ 1,264,000 $ 1,810,000
Deferred (91,000) (28,000) (98,000)
----------- ----------- -----------
698,000 1,236,000 1,712,000
----------- ----------- -----------
State
Current 116,000 248,000 320,000
Deferred (14,000) (4,000) (17,000)
----------- ----------- -----------
102,000 244,000 303,000
----------- ----------- -----------
$ 800,000 $ 1,480,000 $ 2,015,000
=========== =========== ===========
The following is a reconciliation of income taxes to normal expected
Federal income tax computed by applying statutory rates for the years ended June
30:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory rate - 34% $ 665,000 $ 1,334,000 $ 1,800,000
State or local taxes, net of federal benefit 65,000 159,000 198,000
Non-deductible expenses 34,000 48,000 23,000
Valuation allowance 385,000 -- --
Other (349,000) (61,000) (6,000)
----------- ----------- -----------
$ 800,000 $ 1,480,000 $ 2,015,000
=========== =========== ===========
</TABLE>
The components of temporary differences and their tax effects which comprise the
Company's net deferred tax asset (liability) are as follows at June 30:
1999 1998
----------- -----------
Deferred tax assets:
Subfranchisor revenues $ 1,508,000 $ --
Franchisee revenues 283,000 197,000
Allowance for doubtful accounts 165,000 103,000
Start up costs for Maui Tacos 108,000 --
Net operating loss carryforward of Maui Tacos 188,000 --
Other 186,000 5,000
Valuation allowance (385,000) --
----------- -----------
2,053,000 305,000
----------- -----------
Deferred tax liabilities:
Subfranchisor revenue recognition -- (312,000)
Trademark amortization (140,000) --
----------- -----------
(140,000) (312,000)
----------- -----------
$ 1,913,000 $ (7,000)
=========== ===========
F-14
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 7: Income Taxes (continued)
The valuation allowance for deferred taxes relates to net deferred tax
assets of Maui Tacos, a majority-owned subsidiary that is not consolidated for
tax purposes. The valuation allowance was established due to the uncertainty of
the related deferred tax assets' ultimate realization. Maui Tacos has net
operating loss carryforwards of approximately $537,000 expiring in 2019.
Note 8: Commitments and Contingencies
The Company leases its facilities under noncancelable operating leases,
expiring in various years through the year 2012. The minimum future annual
rentals under these noncancelable operating leases as of June 30, 1999 for each
of the next five years and in the aggregate, are as follows:
Year Amount
------------------- ---------
2000 $ 479,000
2001 446,000
2002 456,000
2003 342,000
2004 40,000
2005 and thereafter 194,000
----------
$1,957,000
==========
The Company is also obligated for increases in real estate taxes and
operating costs. Rent expenses including real estate taxes and operating costs
amounted to $520,000 in 1999, $425,000 in 1998, and $383,000 in 1997.
The Company's leasing subsidiaries execute leases for approved Blimpie
restaurant locations and then sublease the premises to franchisees. Under the
terms of the typical lease agreement, the Company's leasing subsidiary's
liability is limited to its net assets and the landlord agrees to not commence
any legal proceedings against Blimpie International, Inc. The franchisee assumes
the payment of rent and agrees to perform all terms, convenants and conditions
of the original lease. As a result, the Company has not recorded lease expense
and sublease income in the accompanying consolidated financial statements. As of
June 30, 1999, there were 587 leasing subsidiaries with aggregate net assets of
$337,000, which are included in cash and other assets in the accompanying
consolidated balance sheet. The terms of these leases range from 5 to 20 years.
The minimum annual lease payments for the fiscal years ending June 30 are as
follows:
Year Amount
------------------- ------------
2000 $ 14,646,000
2001 13,116,000
2002 11,309,000
2003 9,193,000
2004 7,697,000
2005 and thereafter 17,381,000
------------
$ 73,342,000
============
F-15
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 8: Commitments and Contingencies (continued)
According to the terms of signed agreements between the Company and its
franchisees, the Company is obligated, among other things, to supply to the
franchisee logo types, dies, mats, etc., of its trademarks, along with sets of
materials, manuals and forms at a price equivalent to the Company's cost for
such materials, and certain training and continued support. The Company, in
conjunction with the subfranchisors and master licensors, assists in the
selection and purchase of equipment and helps the franchisee to obtain financing
of the initial cost of franchising. Subfranchisors and master licensors are
responsible for providing day-to-day operational support for Blimpie franchise
restaurants in their territory, and in return receive compensation approximating
half of the fees collected from the individual Blimpie franchises. These
services are performed under the Company's supervision.
Various claims and lawsuits arise in the normal course of business. It is
the Company's practice to vigorously defend all actions. Although the amount of
liability as of June 30, 1999 with respect to all claims and lawsuits cannot be
ascertained, in the opinion of management, the resulting liability, if any, will
not materially affect the Company's results of operations or financial position.
Note 9: Trademarks
Messrs. Anthony P. Conza and David L. Siegel (both of whom are officers,
directors and principal shareholders of the Company), and Metropolitan Blimpie,
Inc. ("MBI"), an unrelated company, own respectively, undivided 40%, 20% and 40%
interests in the Blimpie trademarks and the Blimpie marketing system. Pursuant
to various agreements made by and among such parties, (1) Prior to the
acquisition of such rights by the Company in 1997 and 1999, Messrs. Conza and
Siegel possessed the exclusive right to exploit, directly or indirectly, the
Blimpie trademarks and Blimpie marketing system in 35 entire states and various
portions of other states throughout the USA (the "Conza-Siegel Territory"); (2)
MBI possessed the exclusive right to exploit, directly or indirectly, the
Blimpie trademarks and Blimpie marketing system in the balance of the USA
outside of the Conza-Siegel Territory (the "MBI Territories"); and (3) Messrs.
Conza and Siegel and MBI possess the exclusive right to exploit, directly or
indirectly, the Blimpie trademarks and Blimpie marketing system throughout the
world outside of the USA.
Prior to the acquisition of the trademark rights in 1999, the Company,
pursuant to 99 year grants made to it in 1976 by Messrs. Conza and Siegel, had
the exclusive right to distribute the Blimpie trademarks and license the use of
the Blimpie marketing system throughout the Conza-Siegel Territory. By agreement
dated July 19, 1991 (the "1991 Agreement"), MBI granted to the Company the right
to license the Blimpie trademarks and Blimpie marketing system throughout the
MBI Territories (with specific exceptions). Pursuant to the 1991 Agreement, the
Company may also exploit the rights possessed by MBI outside of the USA with
respect to the Blimpie trademarks and Blimpie marketing system. In consideration
for the grants made to the Company by the 1991 Agreement, the Company agreed to
pay specified percentages of all revenues derived by the Company from the sales
of franchises within the MBI Territories and outside of the USA, subject to a
minimum annual payment requirement of $100,000. The 1991 Agreement provided for
an initial term of 42 months, and further provides for automatic annual renewals
until July, 2090, provided that the Company continues to pay said minimum annual
payments. The payments made to MBI under this arrangement were $778,000 in 1999,
$837,000 in 1998, and $968,000 in 1997.
On February 18, 1997, the Company entered into an agreement (the "1997
agreement") with Anthony P. Conza and David L. Siegel to acquire the ownership
of the undivided 60% interest in the international rights to the Blimpie
trademarks and Blimpie marketing system owned by such individuals. The agreement
superseded a licensing agreement pertaining to such international trademark and
marketing system rights which the Company had previously entered into with such
individuals. Pursuant to the agreement, the Company acquired the rights for $4.5
million of cash paid at closing, plus certain contingent payments. The
contingent payments would generally be required once cumulative international
F-16
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 9: Trademarks (continued)
revenues exceed $5,000,000. The contingent payments of $150,000 per year would
generally commence on January 1, 2002 and continue for 50 years. The agreement
also provided Messrs. Conza and Siegel with an option to require the Company to
pay $3,000,000 to Messrs. Conza and Siegel on January 2, 2001 in exchange for a
cancellation of their right to receive the contingent payments. As of June 30,
1998, the Company believed it was probable that Messrs. Conza and Siegel would
elect to effect a cancellation of contingent payments in exchange for the
receipt of $3,000,000. Therefore, the Company recorded, at June 30, 1998, the
remaining international trademark rights and related trademark obligation of
$3,000,000 in the balance sheet as trademark assets and trademark obligations,
respectively.
In February 1999, the Company amended the 1997 agreement with Messrs.
Conza and Siegel to allow earlier payment of the cancellation option in exchange
for a transfer of the domestic trademark rights held by such individuals to the
Company. The amended agreement permitted Messrs. Conza and Siegel to exercise
the lump-sum payment options and receive payment on or before February 15, 1999.
Both individuals exercised their options, and were paid their lump-sum payments
on February 10, 1999. In connection with such payment, the individuals repaid
certain demand notes aggregating $150,000, plus accrued interest, relating to
purchases of shares of the Company's stock. Such demand notes had been recorded
as a reduction of shareholders' equity. As a result of the above transactions,
the Company now owns an undivided 60% interest in the domestic and international
Blimpie trademark rights. The remaining 40% of such rights are owned by MBI.
Messrs. Conza and Siegel no longer own any of the rights to the Blimpie
trademarks or the Blimpie marketing system.
On October 1, 1995, the Company entered into an agreement to settle a
trademark infringement proceeding which it commenced in Canada against an
unaffiliated party ("claimant") who had filed trademark registration documents
seeking Canadian trademark protection for the name "Blimpie" prior to the time
the Company made such filings in Canada. Pursuant to the agreement, the Company
acquired all rights held by the claimant in said Canadian trademark registration
in consideration for the payment of $40,000 and an agreement to issue 125,000
unregistered shares of the Company's common stock at the rate of 25,000 shares
per year. As of June 30, 1999, 100,000 shares of common stock had been issued to
the claimant. The future issuances of such shares are subject to the claimant's
ongoing compliance with various conditions specified in the agreement.
F-17
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 10: Related Party Transactions
The Company had numerous transactions which result from written agreements
between the Company and subfranchisors who are related parties. The following is
a summary of the types of transactions and revenue or expense recognized related
to these transactions for the years ended June 30:
<TABLE>
<CAPTION>
Revenue or Expense
Related Party Recognized 1999 1998 1997
- -------------------------------- -------------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Georgia Enterprises, Inc., a Revenue derived from area $2,514,000 $3,814,000 $3,122,000
corporation partially owned by Reimbursement of expenses -- 4,000 168,000
two officers of the Company Fees paid to subfranchisor 1,155,000 1,149,000 984,000
Llewellyn Distributors, Inc., Revenue derived from area 525,000 649,000 716,000
a corporation partially owned Reimbursement of expenses 110,000 119,000 101,000
by an officer of the Company Fees paid to subfranchisor 305,000 281,000 289,000
International Southwest Blimpie, Revenue derived from area 123,000 544,000 532,000
Inc., a corporation principally Reimbursement of expenses -- 8,000 49,000
owned and controlled by an Fees paid to subfranchisor 53,000 146,000 150,000
officer of the Company
</TABLE>
In November 1998, International Southwest Blimpie, Inc. was sold to a
party unrelated to the Company. No additional revenue or expenses are expected
to be earned or paid to this officer related to this territory subsequent to
November 15, 1998.
During fiscal year ended June 30, 1992, certain officers of the Company
issued demand notes to the Company in the amount of $270,000 for the purchase of
shares of the Company's common stock. The balances of these notes were recorded
as a reduction to equity as subscriptions receivable. In April 1994, an officer
was granted an additional loan of $20,000 against these shares. In February
1999, two of these notes were paid in full totaling $150,000 in conjunction with
the final payment of the trademark obligation to two officers as described in
Note 9. These notes bear interest at the rate of 5% per annum, payable
quarterly. Interest income of $9,000, $12,000, and $12,000 was recognized by the
Company for the years ended June 30, 1999, 1998, and 1997, respectively.
The Company has a note receivable from an officer of the Company due in
semi-monthly installments including interest of 8% per annum through April 2000
(see Note 4). Such note receivable was $50,000 and $51,000 at June 30, 1999 and
1998, respectively.
The Company pays rent based on use of an apartment in New York City, which
is owned by an officer/employee of the Company. Rental expense of $11,000,
$11,000, and $8,000 was recognized for the years ended June 30, 1999, 1998, and
1997, respectively. (See Note 6 and Note 9 with regard to trademark transactions
with related parties).
Note 11: Stock Options and Warrants
The Company has established an Omnibus Stock Incentive Plan ("the Plan")
which permits the Company to award various forms of incentive compensation.
Through June 30, 1999, the Company has issued incentive and nonstatutory stock
options and stock grants under the Plan. The options are exercisable at the fair
market value on the date of grant. The options and stock grants generally
provide for vesting at the rate of 20% per annum. In connection with the
issuance of the stock grants, the Company recognized compensation expense of
$14,000 in 1999, $98,000 in 1998, and $255,000 in 1997.
F-18
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 11: Stock Options and Warrants (continued)
Option activity under the Plan is as follows:
Weighted
Average
Number of Exercise
Options Price
---------- ---------
Outstanding at July 1, 1996 153,650 $ 5.92
Granted 267,000 6.39
Exercised (2,200) 6.77
Canceled (5,800) 11.00
--------
Outstanding at June 30, 1997 412,650 6.15
Granted 15,500 4.86
Exercised (3,750) 3.25
Canceled (44,000) 6.28
--------
Outstanding at June 30, 1998 380,400 6.11
Granted 509,000 2.74
Exercised -- --
Canceled (136,400) 5.91
--------
Outstanding at June 30, 1999 753,000 $ 3.87
========
Options exercisable at June 30, 1999 249,300 $ 4.82
========
The following table summarizes information concerning options outstanding
and exercisable under the Plan at June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ---------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.125 - $ 3.688 511,000 9.12 $ 2.75 102,900 $ 2.76
$5.500 - $ 6.063 229,500 2.77 6.05 136,400 6.05
$7.250 - $14.750 12,500 1.39 9.61 10,000 9.23
----------- ----------
753,000 7.06 3.87 249,300 4.82
=========== ==========
</TABLE>
F-19
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 11: Stock Options and Warrants (continued)
The Company has issued common stock purchase warrants and stock options to
various entities in consideration of services provided to the Company. None of
these securities have been exercised as of June 30, 1999. The following table
summarizes information concerning common stock purchase warrants and options
held by non-employees as of June 30, 1999:
<TABLE>
<CAPTION>
Number of Exercise Expiration
Security Holder Warrants/Options Price Date
- ----------------------------------------- ---------------- -------- ----------
<S> <C> <C> <C>
Unaffiliated design firm 50,000 $ 4.39 Dec. 2002
Minority shareholder of majority-owned
subsidiary 50,000 4.75 Oct. 2002
Unaffiliated advertising agency 10,986 7.51 Sept. 2000
Underwriter of 1995 common stock offering 150,000 8.58 Aug. 2000
Unaffiliated advertising agency 10,985 7.51 May 2000
</TABLE>
On July 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123). As
permitted by SFAS 123, the Company has chosen to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its Plan and apply the disclosure-only provisions of SFAS 123.
Under APB 25, when the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to June 30, 1995 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for fiscal
1999, 1998 and 1997: risk-free interest rates of approximately 6.0%; dividend
yield of $0.07 per share; volatility factor of the expected market price of the
Company's common stock of .50; and a weighted-average expected life of the
options of 4.5 years. The weighted-average fair value of options granted under
the Plan was $1.17, $2.22, and $3.00 for fiscal 1999, 1998, and 1997
respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
F-20
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 11: Stock Options and Warrants (continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information, assuming SFAS 123 had been adopted, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income before cumulative effect of change in
accounting principle $ 1,156,000 $ 2,444,000 $ 3,278,000
Pro forma income before cumulative effect of
change in accounting principle 827,000 2,281,000 3,224,000
Proforma income per share before cumulative effect
of change in accounting principle:
Basic $ 0.09 $ 0.24 $ 0.34
Diluted $ 0.09 $ 0.24 $ 0.33
</TABLE>
Note 12: Convertible Shares of Subsidiary
The shareholders of the Company's majority-owned subsidiary, Maui Tacos,
hold common stock in Maui Tacos that is convertible into Blimpie common stock,
according to the terms stipulated in the Maui Tacos shareholder Agreement, as
amended. Such agreement states that during the period commencing with the first
day of Maui Tacos' third full fiscal year of operations (July 1, 2000) and
ending with the ninetieth day after the Company files its annual financial
statements, all Maui Tacos shareholders, except for the Company, have the right
to convert all or a portion of their respective shares of Maui Tacos common
stock into Company stock, pursuant to a formula (the "Conversion Formula"). The
Conversion Formula is calculated by dividing the lower of Maui Tacos' current or
prior year earnings per share value by the Company's earnings per share value
for the same period. The conversion privileges held by the Maui Tacos
shareholders are subject to limitations on the number of shares of Company stock
that are subject to such conversion rights, both for individual Maui Tacos
shareholders and for aggregate levels of conversions.
Note 13: Employee Benefit Plan
The Company maintains a 401(k) Profit Sharing Plan (the "Plan") available
to substantially all employees. Under the Plan, the Company can elect to make
matching contributions of up to 100% of the elective deferral contributions.
During the years ended June 30, 1999, 1998, and 1997, the Company made matching
contributions of 20% of the elective deferral contributions. The matching
contributions charged to earnings were $66,000, $53,000, and $48,000 for fiscal
1999, 1998 and 1997, respectively. At June 30, 1999, the Plan held approximately
19,000 shares of the Company's common stock with a fair value of approximately
$52,000. The Plan received approximately $300 in dividends on Company shares in
fiscal 1999.
F-21
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 14: Business Segment Information
The Company's separately identifiable segments relate to: franchise
operations, store design services and equipment sales, and restaurant operations
of the company-owned Maui Tacos restaurant.
During 1996, the Company began operations outside of the United States. As
of June 30, 1999, the Company has sold master licenses in Argentina, Bahrain,
Canada, Cyprus, Dominican Republic, Egypt, Greece, Jordan, Kuwait, Lebanon,
Northern Ireland, Oman, Panama, Peru, Poland, Portugal, Puerto Rico, Qatar, The
Republic of Ireland, Romania, Saudi Arabia, South Africa, Spain, United Arab
Emirates, Great Britain, Uruguay, and Venezuela. Franchisees are operating in
the following countries: Argentina, Canada, Cyprus, Dominican Republic, Jordan,
Panama, Poland, Portugal, Saudi Arabia, South Africa, Spain, Great Britain and
Venezuela. There were no capital expenditures outside of the United States in
1999, 1998, or 1997.
Financial information by identifiable segments is as follows for the years
ended June 30:
<TABLE>
<CAPTION>
Operating Depreciation
Income Identifiable and
1999 Revenue (Loss) Assets Amortization
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Franchise operations:
United States $ 23,043,000 $ 1,577,000 $ 24,448,000 $ 675,000
International 760,000 (394,000) 1,454,000 101,000
Equipment and design 9,409,000 (46,000) 2,127,000 56,000
Company restaurant 338,000 (4,000) 229,000 15,000
------------ ------------ ------------ ------------
$ 33,550,000 $ 1,133,000 $ 28,258,000 $ 847,000
============ ============ ============ ============
1998
Franchise operations:
United States $ 22,068,000 $ 2,309,000 $ 24,584,000 $ 525,000
International 663,000 (314,000) 1,127,000 121,000
Equipment and design 14,376,000 1,083,000 2,513,000 60,000
------------ ------------ ------------ ------------
$ 37,107,000 $ 3,078,000 $ 28,224,000 $ 706,000
============ ============ ============ ============
1997
Franchise operations:
United States $ 20,276,000 $ 3,178,000 $ 24,325,000 $ 281,000
International 2,028,000 221,000 1,620,000 112,000
Equipment and design 15,033,000 1,004,000 1,759,000 48,000
------------ ------------ ------------ ------------
$ 37,337,000 $ 4,403,000 $ 27,704,000 $ 441,000
============ ============ ============ ============
</TABLE>
F-22
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 15: Subfranchisor Fees and Franchise Revenue
Franchise Fees and Costs
The initial non-refundable fee for franchisees that have previously never
owned a traditional Blimpie or Maui Tacos restaurant is $18,000 and $20,000,
respectively. Maui Tacos agreements include franchise rights to Smoothie Island.
Blimpie franchisees may purchase a Smoothie Island franchise for $1 to $2,500.
These fees generally are payable in cash at the time of execution of the
franchise agreement. Additional franchises are awarded at lesser amounts based
upon the number of units awarded. The initial non-refundable franchise fee for
non-traditional Blimpie restaurants, such as those in convenience stores,
institutional food service entities, colleges, schools, mass feeders, hospitals
and others range from $1.00 to $18,000 (depending upon the number of non
traditional restaurant transactions executed, the location of the
non-traditional franchised restaurant, the marketing area and other subjective
matters). The Company reserves the right to issue franchises to its
subfranchisors or their designees for $1.00 to $5,000 each in order to
accelerate the development of the area of the subfranchisor. The Company defers
recognition of the revenues and costs related to these transactions until the
restaurant is opened. The number of franchised Blimpie restaurants open as of
June 30, 1999, 1998, and 1997 were 2,097 (2,040 United States, 57
International), 1,972 (1,935 United States, 37 International), and 1,684 (1,667
United States, 17 International) respectively. The Company operates one
Company-owned Maui Tacos restaurant.
The following is a summary of the deferred franchise revenues and costs.
Number
Revenues Costs of Units
----------- ----------- -----------
Balance June 30, 1996 $ 3,896,000 $ 2,910,000 878
Franchises awarded 3,356,000 2,612,000 632
Revenue recognized (3,711,000) (2,834,000) (737)
----------- ----------- -----------
Balance June 30, 1997 3,541,000 2,688,000 773
Franchises awarded 2,672,000 2,092,000 439
Revenue recognized (3,308,000) (2,556,000) (697)
----------- ----------- -----------
Balance June 30, 1998 2,905,000 2,224,000 515
Franchises awarded 2,209,000 1,221,000 311
Revenue recognized (2,592,000) (1,888,000) (470)
----------- ----------- -----------
Balance June 30, 1999 $ 2,522,000 $ 1,557,000 356
=========== =========== ===========
Subfranchisor and Master Licensor Fees
The subfranchisor and master licensor fee ranges from $10,000 to $575,000.
These fees typically are established by calculating the population of the area
of the subfranchisor or master licensor and multiplying the population by $0.10
for the United States and $0.01 for International. Subfranchisors and master
licensors in operation as of June 30, 1999, 1998, and 1997 were 106 (85 United
States, 21 International), 105 (86 United States, 19 International), and 121
(105 United States, 16 International), respectively. During the year ended June
30, 1995, the Company implemented new subfranchisor agreements that provide for
annual renewals. Pursuant to the new form of agreement, the Company sells a
territory to a subfranchisor or master licensor for a one-year period, followed
by four to ten renewal terms, all but the last of which are annual in duration.
If the subfranchisor or master licensor has met all terms and conditions of the
subfranchise or master license agreement during the initial one year term and
each of the one year renewal terms, a right is granted during the final renewal
term upon payment of the fee set forth in the agreement such that the entire
term of the agreement is 50 to 60 years.
F-23
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 15: Subfranchisor Fees and Franchise Revenue (continued)
Subfranchisor and Master Licensor Fees (continued)
Prior to implementing the new form of agreement, the Company generally
entered into a 10-year agreement with four ten-year renewal periods. The Company
recorded a receivable for the full amount due under the contract, but deferred
the uncollected portion until payment was received, or until the revenue
generated by the related market was sufficient to ensure that payment would be
made.
Effective July 1, 1998, the Company changed its accounting policy related
to the recognition of subfranchisor and master licensor fees (see Note 2). This
change was accounted for as a cumulative effect adjustment in fiscal 1999, as
reflected in the table below. The following is a summary of the remaining
deferred subfranchisor fees:
Revenues Costs
=========== ===========
Balance July 1, 1996 $ 693,000
Revenue recognized (221,000)
-----------
Balance June 30, 1997 472,000
Subfranchisor fees 32,000
Contracts amended (180,000)
Revenue recognized (269,000)
-----------
Balance June 30, 1998 55,000
Cumulative effect of accounting change 6,840,000 $ 1,652,000
Sales of subfranchises and
master licenses 805,000 133,000
Revenue recognized (1,437,000) (267,000)
----------- -----------
Balance June 30, 1999 $ 6,263,000 $ 1,518,000
=========== ===========
Note 16: Earnings Per Share
Earnings per share on a basic and diluted basis is calculated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income before cumulative effect of change
in accounting principle $1,156,000 $2,444,000 $3,278,000
========== ========== ==========
Calculation of weighted average shares
outstanding plus assumed exercises:
Weighted average basic shares outstanding 9,467,000 9,533,000 9,517,000
Effect of dilutive employee stock options 5,000 16,000 244,000
---------- ---------- ----------
Weighted average diluted shares outstanding 9,472,000 9,549,000 9,761,000
========== ========== ==========
Basic earnings per share before cumulative effect
of change in accounting principle $ 0.12 $ 0.26 $ 0.34
========== ========== ==========
Diluted earnings per share before cumulative effect
of change in accounting principle $ 0.12 $ 0.26 $ 0.34
========== ========== ==========
</TABLE>
F-24
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 17: Quarterly Information (Unaudited)
The following table sets forth a summary of the unaudited quarterly
results of operations for the twelve month periods ended June 30, 1999 and June
30, 1998.
<TABLE>
<CAPTION>
Quarter
------------------------------------------------------ -----------
1999 First Second Third Fourth Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues $ 8,614,000 $ 8,584,000 $ 7,798,000 $ 8,554,000 $33,550,000
Gross profit 3,250,000 3,287,000 3,348,000 3,404,000 13,289,000
Income (loss) before
cumulative effect of
change in
accounting principle 473,000 588,000 530,000 (435,000) 1,156,000
Earnings (loss) per
share before
cumulative effect
of change in
accounting principle:
Basic $ 0.05 $ 0.06 $ 0.06 $ (0.05) $ 0.12
Diluted $ 0.05 $ 0.06 $ 0.06 $ (0.05) $ 0.12
1998
Total revenues $ 9,868,000 $ 9,470,000 $ 8,111,000 $ 9,658,000 $37,107,000
Gross profit 3,548,000 3,354,000 3,205,000 3,520,000 13,727,000
Net income 803,000 761,000 436,000 444,000 2,444,000
Earnings per share:
Basic $ 0.08 $ 0.08 $ 0.05 $ 0.05 $ 0.26
Diluted $ 0.08 $ 0.08 $ 0.05 $ 0.05 $ 0.26
</TABLE>
The fourth quarter of fiscal 1999 included provisions, net of tax, of
approximately $255,000 to increase the allowance for doubtful accounts, $325,000
for additional professional fees and legal settlements, $260,000 write-down of
deferred franchise fees, and $100,000 write-off of start-up costs.
The quarterly amounts shown for fiscal 1999 above differ from those
reported in the Form 10-Q filed for each of the first, second and third
quarters. The amounts originally reported were adjusted to reflect the
retroactive application of changing to a different subfranchisor and master
license fee revenue recognition method (Note 2). Additionally, the amounts shown
above for the first, second and third quarters of both fiscal 1999 and 1998
differ from those reported in the respective Form 10-Q due to a reclassification
of certain management fees from Management fees and other income to Selling,
general and administrative expenses, and for a reclassification of Company
restaurant sales and Restaurant operations from Management fees and other income
to separate classification in the Statements of operations and comprehensive
(loss) income.
F-25
<PAGE>
Blimpie International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 18: Year 2000 Issues (Unaudited)
The Company's business and relationships with its business partners and
customers depend significantly on a number of computer software programs,
internal operating systems and connections to other networks, and the failure of
any of these programs, systems or networks to successfully address the Year 2000
data rollover problem could have a material adverse effect on the Company's
business, financial condition and results of operations. Many installed computer
software and network processing systems currently accept only two-digit entries
in the date code field and may need to be upgraded or replaced in order to
accurately record and process information and transactions on and after January
1, 2000.
The Company utilizes personal computers that are connected to a network
for all of its employee workstations. These personal computers all utilize
Microsoft Windows NT as their operating system. The Company believes that the
Windows NT operating system is Year 2000 compliant. Additionally, the Company
recently installed new software to operate all of its accounting operations. The
Company believes this new software, and the computer hardware on which it runs,
to be Year 2000 compliant. Management anticipates that all accounting operations
will be performed using the Year 2000 compliant software by December 31, 1999.
The majority of the costs of installing and implementing the aforementioned
software and hardware had been incurred prior to June 30, 1999. The Company
anticipates that any additional expenditures to complete the implementation will
be funded from cash flow generated by operations.
The Company primarily does business with its subfranchisors and its
franchisees who in turn deal with retail customers and food distribution
companies. The Company has considered the transactions it conducts with its
subfranchisors and franchisees in its analyses of the Year 2000 issue, and
believes that it has completed substantially all modifications to the computer
systems used in these transactions to ensure the systems are Year 2000
compliant. The Company is not certain as to whether the computer software and
business systems of its franchisees' suppliers are Year 2000 compliant. The
failure or delay of these distributors to successfully address the Year 2000
issue may result in delays in placing or receiving orders for goods and services
at the store level. Such delays may result in lost revenues for the franchisees,
and in turn, lower continuing fee revenue for the Company. The Company
anticipates that such delays and lost revenues, if any, would be minimal.
The Company intends to continue to monitor its Year 2000 compliance and to
correct any noncompliance as it is discovered. Management anticipates funding
such efforts out of operating cash flow. The Company believes that the effects
of any noncompliance on its part, or by its customers and suppliers, will not
have a material adverse effect on the Company's business, financial condition,
results of operations or cash flows.
F-26
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
Blimpie International, Inc. and Subsidiaries:
In connection with our audit of the consolidated financial statements of Blimpie
International, Inc. and Subsidiaries as of June 30, 1998 and for each of the two
years in the period ended June 30, 1998, which financial statements are included
in this Annual Report of Form 10-K, we have also audited the financial statement
schedule on page F-28 herein.
In our opinion, this financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
August 17, 1998
F-27
<PAGE>
Blimpie International, Inc. and Subsidiaries
SCHEDULE II
CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(in thousands except for per share amounts)
- -------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -------------------------------------------------------------------------------------------------------
Balance at Charged to Charged to Balance at
Beginning Cost and Other End of
Description of Period Expenses Account Deductions Period
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1999
Accounts receivable $ 207 $ 306 $ -- $ 121 $ 392
Notes receivable 65 101 -- 85 81
Year ended June 30, 1998
Accounts receivable 83 147 -- 23 207
Notes receivable 60 5 -- -- 65
Year ended June 30, 1997
Accounts receivable 47 78 -- 42 83
Notes receivable 47 13 -- -- 60
</TABLE>
F-28
Ernst & Young LLP Letterhead
Mr. Brian D. Lane
Vice President, Chief Financial Officer
Blimpie International, Inc.
1775 The Exchange, Suite 600
Atlanta, Ga. 30339
Dear Sir:
Note 2 of Notes to the consolidated financial statements of Blimpie
International, Inc. included in its Form 10-K for the year ended June 30, 1999
describes a change in the method of accounting for subfranchisor and master
license fee revenues from recognizing such fees when collected or due to
recognizing such fees on a straight-line basis over ten years. You have advised
us that you believe that the change is to a preferable method in your
circumstances because the new revenue recognition policy results in a better
matching of revenues and related expenses incurred in the earnings process
related to such revenues.
We conclude that the change in the method of accounting for subfranchisor and
master license fee revenues is to an acceptable alternative method which, based
on your business judgment to make this change for the reason cited above, is
preferable in your circumstances.
Very truly yours,
/s/ Ernst & Young LLP
December 13, 1999
Atlanta, Georgia
Exhibit 10.45
FRANCHISE AGREEMENT
THIS AGREEMENT made this day of Month, _____, by and between Maui Tacos
International, Inc., a Georgia corporation, located at 740 Broadway, 12th Floor,
New York, New York 10003 (the "Franchisor"), and Franchisee located Address (the
"Operator," as also defined in Article 10):
DEFINITIONS
In this Agreement the following capitalized terms shall have the meanings
set forth below, unless the context otherwise requires:
(i) A Maui Tacos Branded Product is any product now existing or developed
in the future that bears Franchisor's Marks and is sold by some or all Maui
Tacos Franchisees or Franchisor or other entities such as supermarkets, grocery
stores or convenience stores.
(ii) A Maui Tacos Distribution Point or Distribution Point is any system
other than a Maui Tacos Restaurant, where Authorized Maui Tacos Products using
Franchisor's Marks are sold, such as carts, kiosks, vending machines or other
product distribution systems developed now or in the future and authorized by
Franchisor.
(iii) A Maui Tacos Restaurant is a restaurant or other outlet, whether a
Traditional Restaurant or a Nontraditional Restaurant, that specializes in the
sale of Authorized Maui Tacos Products, as defined below, is operated under
Franchisor's Marks, as defined below, and is authorized by a Franchise or
License Agreement made or approved by Franchisor.
(iv) A Nontraditional Restaurant is a Maui Tacos Restaurant located within
another primary business or in conjunction with other businesses, some of which
may be other fast-food type operations. A Nontraditional Maui Tacos Restaurant
will likely be installed within other primary businesses or within a
multi-branded facility where other branded or nonbranded restaurants share
common space.
(v) A Traditional Restaurant is a business premises that exists primarily
as a Maui Tacos Restaurant. However, such Traditional Restaurant may also have
other types of businesses located in it, but in such case the Maui Tacos
Restaurant is the primary business.
(vi) A System Restaurant is a Maui Tacos Restaurant from which Maui Tacos
Authorized Products are sold for on-premises and off-premises consumption and
from which Authorized Maui Tacos Products may be delivered for off-premises
consumption.
(vii) Authorized Products or Maui Tacos Authorized Products are products
approved or authorized by Franchisor in accordance with Article 5 or 8 of this
Agreement.
WHEREAS, Franchisor is the owner of the trademark "Maui Tacos", which has
been filed and/or registered with the United States Patent and Trademark Office
of the United States of America, and may, in the future become the owner,
licensee and/or authorized distributor for other
<PAGE>
trademarks, including logos and designs, related or unrelated to Franchisor's
Marks (referred to in this Agreement as "Franchisor's Marks"); and
WHEREAS, Franchisor has developed and continues to develop a system for
merchandising Maui Tacos authorized products, which system includes distinctive
signs, food recipes, uniforms, and various trade secrets and other confidential
information, and in some cases also includes architectural designs, equipment
specifications, layout plans, inventory, record-keeping and marketing techniques
(the "System") which are materially reflected in Franchisor's Operations Manual
and Construction Manual (collectively, the "Manuals"). Franchisor identifies the
System by Franchisor's Marks, and such other Trademarks, service marks, trade
names, logos and designs as may be designated by Franchisor in writing as being
authorized for use in the System. Franchisor's Marks identify for the public the
source of the services rendered in accordance with the standards and
specifications established by Franchisor; and
WHEREAS, the System as used in existing Traditional and Nontraditional
Maui Tacos Restaurants and Maui Tacos Distribution Points have established or
will establish a reputation for quality, cleanliness, appearance and service,
and through such operations and continued marketing and advertising efforts,
have created demand and goodwill for the authorized Maui Tacos food products
sold as a result of which the System has acquired valuable goodwill and a
favorable reputation; and
WHEREAS, Operator desires to enjoy the benefits of (i) operating under the
System and using Franchisor's Marks, and (ii) being authorized and licensed to
operate one System Restaurant as set forth below within the System in strict
accordance with the standards and specifications established by Franchisor; and
WHEREAS, Franchisor is willing to grant Operator a license under
Franchisor's Marks and the System, subject to Operator's strict compliance with
the terms and conditions of this Agreement.
NOW, THEREFORE, the parties agree as follows:
ARTICLE 1. FRANCHISE RIGHT GRANTED, LOCATION.
1.1 GRANT.
In consideration of the issuance of the franchise granted herein, Operator
shall pay to Franchisor the non-refundable sum of $Price (the "Initial Fee"). In
exchange, Franchisor hereby awards Operator the exclusive right to open and
operate, under the terms of this Agreement, one System Restaurant specializing
in selling high quality limited and specific food items as specified by
Franchisor in Franchisor's Operations Manual, or subsequently added in
accordance with Operations Manual amendments, under the name "Maui Tacos" at a
location to be mutually agreed upon by both parties. No exclusive or protected
market is intended to be granted by this Article. The Initial Fee shall be
deemed fully earned by Franchisor upon the execution of this Agreement by
Franchisor and Operator and shall not be refunded, in whole or in part, upon any
termination of this Agreement, or at any other time or under any other
circumstances.
2
<PAGE>
1.2 LICENSE.
Franchisor hereby grants and awards to Operator, for the term set forth in
this Agreement, and any renewal term, beginning on the date of this Agreement,
the right and license, and Operator hereby undertakes the obligation, to operate
the business described in this Agreement under Franchisor's Marks and such other
of Franchisor's Marks as may be designated by Franchisor, to operate such
business solely in accordance with the System, and only at the specific location
to be agreed upon by Franchisor and Operator (the "Location").
1.3 LOCATION.
No Location has been agreed upon at the time of the execution of this
Agreement. Upon the leasing of the Location, Operator agrees to sublet the
Location from an independent corporation designated by Franchisor, on the
approved sublease form annexed to Franchisor's Uniform Franchise Offering
Circular (the "UFOC", as further defined in Article 18). Any material violation
of the sublease that is not cured after notice is given and within the
applicable grace periods, as required by the terms of the sublease for the
Location, is a violation of this Agreement. The signing of the sublease for the
Location, or Operator's or any of its principle stockholder's or officer's
written approval of the master lease for the Location, shall constitute
Operator's approval of the Location. Operator shall engage only in the business
of operating a System Restaurant at the Location and no other, except with
Franchisor's prior written consent. Operator acknowledges its sole
responsibility for finding the Location and that Franchisor is not obligated to
directly or indirectly obtain an approved location for Operator. Franchisor's
area subfranchisor, if any, as identified herein, however, may voluntarily
(without obligation) assist Operator in obtaining an approved location, as well
as other approved locations for other System Restaurant operators who have
executed existing franchise agreements.
ARTICLE 2. INSTALLATION AND COMMENCEMENT OF BUSINESS.
Operator, at its own expense, shall (i) renovate the Location into a
System Restaurant; (ii) obtain all necessary governmental permits and licenses
prior to beginning the renovation of its Location into a System Restaurant and
Operator shall fully complete the renovation, construction and equipping within
a reasonable time thereafter. Operator shall commence operation of each System
Restaurant no later than 30 days following substantial completion of the
renovation and equipment installation at the Location, and shall give Franchisor
10 days written notice prior to commencing operations. In no event shall
Operator construct or remodel the interior or exterior of any System Restaurant
or make any improvements which vary from the then-current standards, plans, and
specifications approved by Franchisor, without first obtaining Franchisor's
prior written approval. Operator, at its own expense, shall obtain all municipal
and state licenses necessary to operate Operator's System Restaurant prior to
commencing business at its System Restaurant and shall maintain all licenses in
full force and effect during the term of this Agreement.
ARTICLE 3. TRAINING.
3.1 Operator will designate individuals (up to 4 persons) as trainee(s) to
attend Franchisor's training school in Atlanta, Georgia (the "Maui Tacos
Training School") or at another
3
<PAGE>
training location selected by Franchisor. Franchisor will offer initial training
programs for Operator and its management employees at times selected by
Franchisor. Franchisor will bear the costs of providing training programs,
including the overhead costs of training, staff salaries, materials, and all
technical training tools. Operator shall pay all traveling, living,
compensation, and other expenses incurred by Operator and/or Operator's
employees in connection with attendance at training programs. The training
program and manner of conducting such program shall be at Franchisor's sole
discretion and control. The training course will be structured to provide
practical training in the implementation and operation of a System Restaurant as
described in the UFOC.
3.2 Operator will not allow any System Restaurant to be opened or managed
by any person who has not attended and successfully completed the management
training course designated by Franchisor. If Operator is an individual, and does
not manage its System Restaurant on a day-to- day basis, and in the event its
designated System Restaurant manager resigns or is terminated, Operator must
arrange to have the successor restaurant manager (i) begin the required training
course within 45 days of first assuming the duties of a restaurant manager and
(ii) successfully complete the course. Provided Operator successfully completes
the training program, the required training course conducted at Franchisor's
facilities will not extend beyond one (1) week. However, the course conducted at
Franchisor's facilities requires an additional 120 hours of operational training
in a Franchisor-approved System Restaurant.
3.3 If at any time the trainee voluntarily withdraws from, or is unable to
complete its training, or fails to demonstrate an aptitude, spirit or ability to
comprehend and carry out the course of study to the reasonable satisfaction of
Franchisor, then Franchisor shall have the right to require Operator's trainee
to attend other training class(es) or to perform additional operational training
until Franchisor is reasonably satisfied that Operator's trainee has
satisfactorily completed the training course. Operator may not open its System
Restaurant until training is completed to Franchisor's reasonable satisfaction.
3.4 In the event of a sale to a third party of Operator's System
Restaurant after opening, the transferee must be trained in the Maui Tacos
Training School as a condition of Franchisor's consent to such transfer. All
tuition costs for such training shall be deemed paid upon receipt by Franchisor
of 5% of the sales price of operator's System Restaurant due in accordance with
Article 14 herein. In the event of an approved non-sale management transfer to a
third party of Operator's System Restaurant, the transferee shall attend the
Maui Tacos Training School and pay to Franchisor the training fee, which fee
shall not exceed $1,500. No System Restaurant shall open or re-open until the
Maui Tacos Training School certifies that the transferee is approved to operate
the respective System Restaurant.
3.5 Additional training sessions are available at Operator's request and
expense, and at Franchisor's request, at Operator's expense, except for the
initial training course itself. Operator's attendance at additional training
sessions is mandatory if they are scheduled in Operator's state. For this
additional training, Franchisor will provide the instructors and instructional
materials, but Operator must arrange for transportation, lodging and food for
itself and/or its manager. The cost will depend on the distance Operator must
travel and the type of accommodations Operator chooses. Additionally, Operator
must attend regional meetings when and if established by Franchisor, must attend
annual national conventions when and if scheduled and must pay the registration
fee.
4
<PAGE>
ARTICLE 4. MANUALS AND STANDARDS OF OPERATOR
QUALITY, CLEANLINESS AND SERVICE.
4.1 STANDARDS.
In order to promote the value and goodwill of Franchisor's Marks and the
System and to protect Franchisor's Marks and the other Maui Tacos operators who
comprise the Maui Tacos franchise system, Operator agrees to conduct its
business in accordance with the standards promulgated by Franchisor as follows:
4.2 MANUALS.
4.2.1 In the Manuals and other publications, Franchisor will list
authorized products to be sold by Operator, and promulgate standards of
operation for System Restaurants, including standards of quality, cleanliness,
and service for all food, beverages, furnishings, interior and exterior decor,
supplies, fixtures, and equipment used in connection with each System
Restaurant. Operator agrees to operate its System Restaurant in accordance with
the standards, specifications and procedures set forth in the Manuals, this
Agreement and the sublease for the Location. Operator further agrees that
changes in the menu, or the standards, specifications and procedures may become
necessary from time to time and agrees to accept as reasonable all
modifications, revisions and additions to the Manuals as authorized by
Franchisor. The sale of any product or service at the Operator's Location,
without Franchisor's prior written approval shall constitute a material
violation of this Agreement.
4.2.2 The Manuals and all amendments to the Manuals (and copies thereof)
are copyrighted and remain Franchisor's property. They are loaned to Operator
for the term of the Agreement, and must be returned to Franchisor upon the
Agreement's termination, expiration or nonrenewal. The Manuals are highly
confidential documents which contain certain trade secrets of Franchisor, and
Operator shall never reveal, and shall take all reasonable precautions, both
during and after the term of this Agreement, to assure that its employees or any
other party under Operator's control, shall never reveal any of the contents of
the Manuals or any other publication, recipe or secret provided by Franchisor,
except as is necessary for the operation of Operator's System Restaurant.
4.3 HOURS.
Franchisor and Operator agree that the hours of operation of Operator's
System Restaurant are at a minimum, 10:00 am. to 12:00 p.m. (midnight), seven
days per week, and Operator agrees to operate its System Restaurant during such
hours. If the Location is in a mall or shopping center, the hours of the mall or
shopping center shall control. Operator shall diligently and efficiently
exercise its best efforts to achieve the maximum gross sales possible from its
location, and will be open for business not less than 14 hours per day, seven
days per week, unless additional opening hours are reasonably required to
maximize operations and sales. If such hours are incorrect in relation to the
sales potential of Operator's System Restaurant, then Franchisor and Operator
shall reasonably adjust such hours by jointly establishing new hours of
operation. It is acknowledged that the hours
5
<PAGE>
of other operators will vary in relation to each respective location, and local
legal restrictions, if any.
4.4 APPEARANCE.
From time to time, Operator's System Restaurant may need a cosmetic
improvement or equipment change or addition in order to comply with the Manuals
and/or to maintain proper operations and an aesthetic appearance and
professional image. Accordingly, Franchisor may require remodeling and
renovation, and modifications to existing equipment and improvements as is
reasonably necessary. Franchisor shall not require any such work at a particular
System Restaurant less than 3 years after the opening of the System Restaurant
except: (i) for additional equipment if new food preparation methods or products
are developed and authorized by Franchisor; (ii) if repairs or repainting are
necessary to maintain the appearance of the interior and exterior of the
Location in a clean and orderly condition satisfactory to Franchisor; or (iii)
upon the sale of the Operator's System Restaurant. Within 90 days after receipt
of written notice, Operator shall fully implement and complete such changes to
its System Restaurant operating under this Agreement.
4.5 PRODUCT LINE AND SERVICE.
Operator agrees to only serve the approved limited product line items
specified by Franchisor in this Agreement or in the Manuals and to follow all
specifications and formulas of Franchisor as to specifications, contents, weight
and quality of products served to its customers from Operator's System
Restaurant.
4.6 CONTAINERS, FIXTURES AND OTHER GOODS.
4.6.1 Operator agrees that all food and drink items will be served in
containers bearing accurate reproductions of Franchisor's Marks. All containers,
napkins, bags, cups, matches, menus and other packaging and like articles used
in connection with Operator's System Restaurant shall conform to Franchisor's
specifications, shall be imprinted with Franchisor's Marks and shall be
purchased by Operator from a distributor or manufacturer approved in writing by
Franchisor, as provided in Article 8, which approval will not be unreasonably
withheld.
4.6.2 No item of merchandise, furnishings, interior and exterior decor
items, supplies, fixtures, equipment or utensils bearing any of Franchisor's
Marks shall be used in or upon any System Restaurant unless the same shall have
been first submitted to and approved in writing by Franchisor.
ARTICLE 5. MENUS, UNIFORMS, INSPECTIONS, SIGNS.
5.1 MENUS.
5.1.1 Operator shall not manufacture, advertise for sale, sell or give
away any product unless such product has been approved in the Manuals as an
authorized product for sale in Operator's System Restaurant and not thereafter
disapproved in writing by Franchisor. All approved products shall be distributed
under the specific name designated by Franchisor. Operator shall establish all
menu prices in its sole discretion. Operator shall offer for sale in its System
Restaurant
6
<PAGE>
only those food products which Franchisor designates as "approved and
authorized" or which Franchisor has made available as a "regionalized" menu or
has otherwise specifically approved in writing (each, "Authorized Product"). No
standard product will be removed from the menu unless Operator is so instructed
by Franchisor.
5.1.2 Such "Authorized Products" shall be marketed by approved menu
formats to be utilized in Operator's System Restaurant. The approved and
authorized menu and menu format(s) may include, in Franchisor's discretion,
requirements concerning organization, graphics, product descriptions,
illustrations, and any other matters (except prices) related to the menu,
whether or not similar to those listed. In Franchisor's discretion, the menu
and/or menu format(s) may vary depending upon region, market size, and other
factors. Franchisor may change the menu and/or menu format(s) from time to time
or region to region or authorize tests from region to region or authorize
non-uniform regions or non-uniform System Restaurant(s) within regions, in which
case Operator will be given a reasonable time (not longer than 30 days) to
discontinue use of any old menu format(s) and implement use of the new menu
format(s).
5.1.3 Operator shall, upon receipt of notice from Franchisor, add any
Authorized Product to its menu according to the instructions contained in the
notice. Operator shall have a minimum of 30 days after receipt of written notice
in which to fully implement any such change. Operator shall cease selling any
previously approved product within 30 days after receipt of notice that the
product is no longer approved.
5.1.4 The Authorized Products sold by Operator shall be of the highest
quality, and the ingredients, composition, specifications, and preparation of
such food products shall comply with the instructions and recipes provided by
Franchisor or contained in Franchisor's Operations Manual, and with the further
requirements of Franchisor as they are communicated to Operator from time to
time.
5.2 COMPLIANCE.
Operator shall operate each of its System Restaurants as a clean, orderly,
legal and respectable place of business in accordance with Franchisor's business
standards and merchandising policies, and shall comply with all applicable
ordinances, laws, statutes and regulations governing the operation of such
premises, including all disability, food and drug laws and regulations. Operator
shall not allow any Location or part of a Location to be used for any immoral or
illegal purpose.
5.3 SIGNS, DESIGNS AND FORMS OF PUBLICITY.
5.3.1 Operator shall maintain a suitable sign or awning at, on, or near
the front of the Location, identifying the Location as a "Maui Tacos
Restaurant". Such sign shall conform in all respects to Franchisor's
requirements and in accordance with the layout and design plan approved for the
Location, except to the extent prohibited by local legal restrictions.
5.3.2 No exterior or interior sign or any design, advertisement, internet
address, "web page" or world wide web home page, sign, or form of publicity,
including form, color, number,
7
<PAGE>
location, and size, shall be used by Operator or any Association (as defined
below) unless first submitted to Franchisor and approved in writing (except with
respect to prices). Any request by Operator for such approval shall be properly
submitted in duplicate to: (i) Franchisor's Legal Department, Attention: General
Counsel, 740 Broadway, New York, New York 10003; and (ii) Franchisor's
President, 1775 The Exchange, Suite 540, Atlanta, Georgia, 30339. Franchisor
shall respond to such request within 30 days of its receipt. Whenever Operator
elects to utilize, in the form supplied, advertising supplied by Franchisor or
any promotional item specifically approved by Franchisor, no further approval
for use of such material is required. Upon written notice from Franchisor,
Operator shall discontinue and/or remove any objectionable advertising materials
or any other materials not suitable for display, in Franchisor's sole
discretion.
5.4 UNIFORMS AND EMPLOYEE APPEARANCE.
Operator shall cause all employees, while working in System Restaurants,
to: (i) wear uniforms of such color, design, and other specifications as
Franchisor may designate from time to time, and (ii) present a neat and clean
appearance. If the type of uniform utilized by Operator is removed from the list
of approved uniforms, Operator shall have 60 days from receipt of written notice
of such removal to discontinue use of its existing inventory of uniforms and
implement the approved type of uniform.
5.5 VENDING OR OTHER MACHINES.
Operator shall not permit vending or game machines or any other mechanical
device to be installed or maintained in its Location without Franchisor's prior
written approval. Operator agrees to purchase, install and maintain a continuous
music system, approved by Franchisor, in its Location. The music selections will
be controlled by Franchisor.
5.6 INSPECTION.
5.6.1 Franchisor's authorized representatives shall have the right to
enter upon the entire main floor and basement of Operator's System Restaurant
during business hours, without disrupting Operator's business operations, for
the purposes of examining same, conferring with Operator's employees, inspecting
and checking operations, food, beverages, furnishings, interior and exterior
decor, supplies, fixtures, and equipment, and determining whether the business
is being conducted in accordance with this Agreement, the System and the
Manuals.
5.6.2 In the event any such inspection indicates any deficiency or
unsatisfactory condition with respect to any matter required under this
Agreement or the Manuals, including but not limited to quality, cleanliness,
service, health and authorized product line, Franchisor will notify Operator in
writing of Operator's non-compliance with the Manuals, the System, or this
Agreement. Operator shall have 24 hours after receipt of such notice, or such
other greater time period as Franchisor in its sole discretion may provide, to
correct or repair such deficiency or unsatisfactory condition, if it can be
corrected or repaired within such period of time. If not, Operator shall within
such time period commence such correction or repair and thereafter diligently
pursue it to completion.
8
<PAGE>
ARTICLE 6. ADVERTISING AND FRANCHISEE CO-OPERATIVES.
6.1 Operator and Franchisor acknowledge the value of advertising and
accordingly Operator agrees to pay 4% of its gross sales for each and every week
of its operations to Franchisor (the "Advertising Fee"). These funds will be
deposited, at Franchisor's sole discretion, into a segregated advertising
account (with other advertising collections) controlled by Franchisor or to a
regional advertising cooperative covering Operator's System Restaurant.
Advertising payments will then be spent for advertising to benefit Operator
and/or all or regional operators of System Restaurants. The Advertising Fee
shall be paid in accordance with the procedure described in Article 9.
6.2 Franchisor, at its sole discretion, may spend the collected fees
directly, or may authorize payment of the advertising collections for media
time, production of media materials, whether for radio, television, newspapers
or store level materials such as flyers, or posters, or for any other type of
advertising or marketing use. Franchisor is not, under any circumstances,
obligated to contribute to any national or local advertising fund, program,
Association, or other organization any advertising fees or contributions.
6.3 Franchisor encourages the formation and operation of voluntary
Operator Cooperative Advertising Associations (each an "Association"). Each
Association shall function for the purpose of creating a cohesive team to
coordinate advertising, marketing efforts and programs and maximizing the
efficient use of local advertising media. If an Association is formed for
Operator's region, each Operator must participate in the Association or lose its
right to vote as to decisions regarding advertising and marketing efforts and
programs. Each Association establishes the fees payable by its members, which
fees are collected by Franchisor and distributed to the Association, subject to
a $10 per restaurant per month collection/service fee.
6.4 If requested, Franchisor will assist in establishing an Association or
otherwise assist in deciding how to allocate all or part of the advertising
funds paid by Franchisor to the Association (such funds will be paid to each
Association at the Franchisor's sole discretion, who is entitled to expend the
funds at its sole discretion in accordance with the provisions of this
Agreement). If Franchisor elects to pay all or a portion of the advertising
collections to an Association and if one of the following events occurs and is
not resolved by the Association, then Franchisor reserves the right to exercise
sole decision-making power over the advertising funds: (i) if an Association
ceases functioning; or (ii) an impasse arises because of the inability or
failure of the Association members to resolve any issue affecting the
establishment or effective functioning of an individual Association; or (iii) an
Association fails to function in a productive or harmonious manner; or (iv) an
Association is unable to approve any advertising program within a reasonable
time not to exceed 30 days. Franchisor reserves the right to establish general
standards concerning the operation of all Associations, advertising agencies
retained by Associations, and advertising programs conducted by Associations. No
decisions shall be made or advertising funds spent without Franchisor's prior
written approval.
6.5 Operator acknowledges receipt of Franchisor's UFOC which refers to (a)
Maui Tacos Brand Building Fund, Inc. ("MTBBFI"); (b) and the Council of Maui
Tacos Suppliers; (c) a research and development fund; (d) the Grand Opening
event, and (e) the Initial Program as
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explained below.
6.5.1 MTBBFI is the non-profit entity authorized to receive marketing
allowances and payments from Maui Tacos distributors, manufacturers and other
entities that are associated in business, directly or indirectly, with
Franchisor or the System or its operators or any part thereof. The activities of
MTBBFI are controlled by Maui Tacos operators elected to the Maui Tacos Operator
Advisory Board, subfranchisors elected to the Maui Tacos Subfranchisor Advisory
Board and representatives of Franchisor. By this Agreement, Operator consents to
the receipt of such funds by MTBBFI or its successors, as well as the
expenditure thereof for advertising and marketing expenses. These expenses may
include costs for personnel, management fees, advertising agencies, operating
expenses, matching fund programs, research and development, administrative
expenses, production of educational or training materials, production of
commercials, focus groups or other studies, the purchase of television or radio
or other media time, print advertising, restaurant design studies or
modifications, consultants and such other marketing and advertising uses as may
be authorized by the majority of elected members of the Maui Tacos Operator
Advisory Board, subfranchisors elected to the Maui Tacos Subfranchisor Advisory
Board and representatives of Franchisor (collectively the "Board"). If for some
reason there is a refusal or inability to participate in such decisions by the
Board or portions thereof, or if there are no elected representatives of
franchisees or subfranchisors, Franchisor is hereby granted the power and
authority to vote for the missing representatives.
6.5.2 By execution of this Agreement, Operator consents to the formation
and existence of the Maui Tacos Brand Building Fund, Inc., its right and
privilege to seek voluntary contributions of 1% to 3% of gross sales, or any
higher fee or a flat fee if a sales percentage is not practical, from all MAUI
TACOS manufacturers, distributors, vendors and purveyors who sell products or
provide services to the MAUI TACOS System or Maui Tacos Brand Building Fund,
Inc., and the system of authorizing utilization of these collections and any
resulting expenditures thereafter.
6.5.3 The Council of Maui Tacos Suppliers is an association composed of
approved manufacturers, distributors and the Franchisor, established for the
purposes of improving communication between manufacturers and distributors, and
improving distribution and development of improved Authorized Products. This
Council reimburses Franchisor for employee and other expenses involved in the
distribution and manufacturing of Raw Materials. Operator consents to the
receipt of such funds by Franchisor;
6.5.4 Franchisor and certain manufacturers have agreed to establish a
research and development fund for improvement of specific Authorized Products
and Operator consents to Franchisor's receipt of reimbursement funds arising
from expenses incurred in such research and development.
6.5.5 In addition to the Advertising Fee, Operator agrees to spend a
minimum of $4,000 for its "Grand Opening" promotion as designated by Franchisor.
The "Grand Opening" event is required for all operators and functions to
introduce Operator's System Restaurant to the public. The application and use of
the "Grand Opening" funds shall be controlled by Franchisor's marketing
department.
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6.5.6 During the first twelve months after the opening of its System
Restaurant, Operator agrees to implement an initial local restaurant marketing
plan which includes coupon and monthly events (the "Initial Program"). To fund
the Initial Program, commencing two weeks after the opening of its System
Restaurant, Operator agrees to pay Franchisor the sum of $2,000 by paying $40
per week for 50 consecutive weeks, in accordance with the procedures established
in Article 8. The application and use of the Initial Program funds shall be
controlled by Franchisor's marketing department or its designee.
ARTICLE 7. COMPANY MARKS AND ADDITIONAL MARKS.
7.1 The license and related rights to use the System, the Manuals,
Franchisor's Marks and any other proprietary products granted by this Agreement
are applicable only with respect to Operator's System Restaurant at the
Location, and not elsewhere, except in the event of a relocation approved in
writing by Franchisor. This Agreement does not authorize the use of mobile
vending vehicles, carts, kiosks or any other non-traditional delivery systems.
7.2 Operator shall not interfere in any manner with, or attempt to
prohibit, the use of Franchisor's Marks by any other Operator of Franchisor or
in connection with Nontraditional Maui Tacos Restaurants, distribution points or
any other system used to distribute Maui Tacos authorized or branded products.
7.3 Franchisor may, from time to time, in Franchisor's sole discretion,
obtain additional trademark and/or service mark rights in words and/or designs.
In the event of any of these occurrences, Franchisor may license Operator to use
those trademarks or service marks by giving written notification to Operator
that such marks now form part of Franchisor's Marks. The term of such license
will be coextensive with the term of this Agreement or as otherwise established
by Franchisor, and will be subject to all restrictions with respect to the use
of those rights as set forth in this Agreement and in the notice granting
Operator the license.
ARTICLE 8. DISTRIBUTION AND PURCHASE OF EQUIPMENT,
SUPPLIES, AND OTHER PRODUCTS.
Operator agrees to use only Franchisor's approved products and portion
control formulas in the preparation of Authorized Products. Operator further
agrees to only buy Raw Materials, as defined below, manufactured in accordance
with Franchisor's specifications from approved manufacturers, distributed by
approved distributors, and sold to Operator as follows:
8.1 DEFINITIONS.
For the purpose of this Agreement, "distributor" is defined as any entity,
except a manufacturer, that directly or indirectly delivers raw materials to the
Operator. A "manufacturer" is defined as the entity that manufactures and/or
sells the Raw Materials to a distributor. Raw Materials means all of the
products purchased from distributors, and/or manufactured or sold by
manufacturers or production entities which are used in the creation of
Authorized Products. Raw Materials include, but are not limited to printed paper
goods, meats, cheeses, produce, seafood, bakery products, salsas, chips,
clothing, rice, beans (collectively, the "Raw Materials").
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"Authorized" means approved by Franchisor in accordance with the procedures
established in this Agreement.
8.2 DISTRIBUTORS.
8.2.1 Operator acknowledges that it is generally unrealistic from a cost
and service basis to have more than one distributor in the market area of
Operator's System Restaurant, and that to obtain the lowest distribution costs,
all regional operators should only purchase from one authorized Maui Tacos
distributor. Operator agrees to only purchase all equipment, supplies, Raw
Materials and other products and materials necessary for the operation of its
System Restaurant solely from Authorized distributors, and other authorized
sources who demonstrate, to the continuing reasonable satisfaction of
Franchisor, the ability to meet Franchisor's then-current standards and
specifications for such items; who possess adequate quality controls and
capacity to supply Operator and all other System operators needs promptly and
reliably; who demonstrate the ability and willingness to work with Franchisor to
provide the assistance needed by the those operators in the region and all other
System Operators; who agree to distribute all authorized Maui Tacos products;
who comply with Franchisor's reasonable requirements; and who have been approved
in writing by Franchisor and not thereafter disapproved.
8.2.2 If Operator desires to purchase any items from an unapproved
distributor, whom Operator desires to become an Authorized distributor, Operator
shall first submit a written request, in duplicate, for such approval to
Franchisor, addressed to (i) President: 1775 The Exchange, Suite 540, Atlanta,
Georgia and (ii) General Counsel, 740 Broadway, New York, New York 10003,
accompanied by a similar written request for approval from the proposed
distributor. Franchisor shall have the right to require that the proposed
distributor provide reasonable financial, operational and economic information
regarding its business and that Franchisor's representatives be permitted to
inspect the proposed distributor's facilities and establish economic terms,
delivery, service and other requirements consistent with other distribution
relationships for other system restaurants. The proposed distributor shall pay
to Franchisor in advance all of Franchisor's reasonable costs in review of the
application of the distributor to service the Operator as well as all current
and future reasonable costs related to inspecting and reinspecting the
distributor's facilities, equipment, Raw Materials in the distributor's
possession at any time. Franchisor may revoke its approval upon the
distributor's failure to continue to meet any of Franchisor's criteria. Nothing
in this article shall require Franchisor to approve any distributor. Upon the
receipt by Franchisor of Operator and the proposed distributor's request for
approval in full compliance of this article, Franchisor will notify Operator of
its decision within 90 days after receipt thereof. In the event an alternate
approved distributor to the recommended distributor is used by Operator, as a
condition thereof Operator and all other operators shall authorize the alternate
distributor to provide to Franchisor duplicate purchase invoices for
Franchisor's records and inspection purposes and to otherwise comply with
Franchisor's reasonable requests.
8.3 MANUFACTURERS.
8.3.1 The parties agree that Franchisor's product specifications and
portion control system are highly confidential information and are trade secrets
of Franchisor. In order to (i) achieve appropriate pricing, (ii) obtain the
specially formulated Maui Tacos authorized Raw Materials for
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Operator and all of Franchisor's System Restaurants, and (iii) establish
consistent uniformity of Maui Tacos products, Operator acknowledges that
purchasing by all System or regional operators from approved manufacturers is a
necessity. Because of the importance of quality and uniformity of product and
the significance of product specifications and portion control in the
preparation of Authorized Products to achieve and maintain such quality and
uniformity, it is to the mutual benefit of the parties that Franchisor closely
control the production and distribution of the Raw Materials used to produce
authorized products sold by Operator. Similar considerations may also apply to
other products which Franchisor may develop in the future. Operator therefore
agrees to purchase only Raw Materials manufactured in accordance with
Franchisor's specifications and quality standards by approved manufacturers who
demonstrate, to the continuing reasonable satisfaction of Franchisor, the
ability to meet Franchisor's then-current standards and specifications for such
items; who possess adequate quality controls and capacity to meet the needs of
Operator and all other System Operators in a given region or territory promptly
and reliably; who demonstrate the ability and willingness to work with
Franchisor and to provide the assistance needed by the Maui Tacos System and who
have been approved in writing by Franchisor and not thereafter disapproved.
8.3.2 If Operator desires to purchase any items from an unapproved
manufacturer, who Operator desires to become an Authorized manufacturer,
Operator shall first submit a written request, in duplicate, for such approval
to Franchisor, addressed to (i) President: 1775 The Exchange, Suite 540,
Atlanta, Georgia 30339 and (ii) General Counsel, 740 Broadway, New York, New
York 10003 accompanied by a similar written request for approval from the
proposed manufacturer. Franchisor shall have the right to require that the
proposed manufacturer provide reasonable financial, operational and economic
information regarding its business and that Franchisor's representatives be
permitted to inspect the proposed distributor's facilities and establish
economic terms, delivery, service and other requirements consistent with other
with other manufacturing relationships for other system restaurants. The
proposed manufacturer shall pay to Franchisor in advance all of Franchisor's
reasonable costs in review of the application of the manufacturer to service the
Operator as well as all current and future reasonable costs related to
inspecting and reinspecting the manufacturer's facilities, equipment and Raw
Materials at any time. Franchisor may revoke its approval upon the
manufacturer's failure to continue to meet any of Franchisor's criteria. Nothing
in this article shall require Franchisor to approve any manufacturer. Upon the
receipt by Franchisor of Operator and the proposed manufacturer's request for
approval in full compliance of this article and the completion of all of the
inspections needed by Franchisor to evaluate the manufacturer, Franchisor will
notify Operator of its decision within 90 days after completion of such
application and inspections. If an alternate approved manufacturer to the
recommended manufacturer is used by Operator, as a condition thereof Operator
and all other operators shall authorize the alternate manufacturer to provide to
Franchisor duplicate purchase invoices for Franchisor's records and inspection
purposes and to otherwise comply with Franchisor's reasonable requests.
8.4 PURCHASE OBLIGATIONS.
Operator agrees to purchase the following items from the approved distributor
and manufacturer designated by Franchisor:
8.4.1 all Branded Maui Tacos Products that bear Franchisor's Mark;
Franchisor has a long
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term strategic plan to create another profit center for Operator and itself by
the sale of Maui Tacos branded products in System Restaurants, supermarkets,
grocery stores, etc. To accomplish this goal, Franchisor intends to develop such
products. To effectuate this long term strategy, Operator agrees to cooperate
with Franchisor with respect to the purchase, display and sale of any Branded
Products authorized for sale by Franchisor. Operator consents to the receipt by
Franchisor of licensing fees from manufacturers who manufacture Branded Products
which will compensate Franchisor for such use of Franchisor's Marks.
8.4.2 certain Maui Tacos standard exterior and interior signs; These signs
require the prior fabrication of sign molds or advance production in quantity to
be either affordable or promptly available. If Franchisor has entered into an
agreement with approved sign manufacturer(s), granting rights to use
Franchisor's Marks in connection with the signs and to sell such signs to Maui
Tacos operators, Operator agrees to purchase its signs from the authorized sign
manufacturer(s).
8.4.3 Coca-Cola fountain service products: Operator agrees to only use the
fountain service Coca-Cola products authorized by Franchisor and no other
beverages unless approved in writing by Franchisor.
8.4.4 Operator agrees that at such times that Franchisor establishes a
regional or national purchasing program for any of the Raw Materials, which may
benefit Operator by reduced price, lower labor costs, production of improved
Authorized Product(s), increased reliability in supply, improved distribution,
Raw Material cost control (establishment of consistent pricing for reasonable
periods to avoid market fluctuations), improved operations by Operator or other
tangible benefits to Operator, Operator will participate in such purchasing
program in accordance with the terms of such program.
ARTICLE 9. CONTINUING FRANCHISE FEES, REPORTS,
BOOKS AND RECORDS.
9.1 CONTINUING FRANCHISE FEES.
9.1.1 Operator shall pay to Franchisor weekly during the term of this
Agreement and any renewals or extensions thereof, 6% of the weekly gross sales
of Operator's System Restaurant. For the purposes of this Agreement, "gross
sales," means gross revenues (excluding price discounts and allowances) received
by Operator as payment, whether in cash or for credit (and, if for credit,
whether or not payment is received therefor), for all beverages, food, and other
goods, services, and supplies including all sales from approved co-brands as
described in Article 23 sold in or from each of Operator's System Restaurants,
and gross revenues received by Operator from any other business (including, but
not limited to, all revenues from any mechanical or other device, such as
vending or game machines installed at the Location) operated at the Location,
excluding sales taxes.
9.1.2 At Franchisor's request, Operator shall promptly execute or
re-execute within 5 days after Franchisor's request, and deliver to Franchisor
appropriate pre-authorized check forms or such other instruments or drafts
required by Franchisor's bank, payable against Operator's bank account, to
enable Franchisor to electronically (draft on Operator's account by electronic
withdrawal), collect the 6% and 4% (see Article 6) of gross sales payable under
the terms of this Agreement. At
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Franchisor's request, Operator shall, within 5 days from such request, promptly
perform such acts as to enable Franchisor or its designee to connect its
computers to Operator's computer(s) or Operator's POS System so that Franchisor
or its designee may electronically obtain statistical information regarding
Operator's business activities that Franchisor may in its sole discretion
request. Operator agrees to not disconnect Franchisor or its designee from such
connection or phone line at any time, for any reason, without Franchisor's prior
written approval. Operator specifically authorizes Franchisor to either "upload"
or "download" information in and from or to its computers, cash registers or
other such devices as allowed by law, as it relates to the System Operation by
internet, intranet, and other networks or other means as they become available.
9.1.3 Operator shall report its gross sales by telephone within 2 days
after the end of each business week (currently Tuesday) or at such other times
as are established by Franchisor in its sole discretion. Operator shall submit
written weekly summaries showing results of its operations by the following
Saturday. If Operator fails to report its sales on a timely basis, Franchisor
may estimate the amount of Operator's sales. Franchisor will then deposit or
transfer the reported, or in the absence of a report, the estimated, amounts due
into its own account, using the System Operator's pre-authorized checks or other
instruments. If any draft, electronic or otherwise, is unpaid because of
insufficient funds or otherwise, then Operator shall pay Franchisor's expenses
arising from such non-payment, including bank fees in the amount of at least
$30.00, hourly staff charges arising from such default, and any other related
expenses incurred by Franchisor. By the 5th day of each month Operator shall pay
to Franchisor any sums unpaid for the prior month to adjust for sales owed for
any partial week or sales that were unpaid, improperly recorded or not credited
on Operators books and records. Operator hereby agrees to pay any sales, use or
other tax now or hereinafter imposed on franchise fees, advertising fees or any
additional rental collected under the sublease for the Location, imposed by any
Federal, state or local governmental authorities. Franchisor, at its sole
discretion, may collect the taxes in the same manner as franchise fees are
collected herein and if Franchisor collects such taxes, Franchisor shall
promptly pay the tax collections to the appropriate governmental authority.
9.2 REPORTS AND INSPECTION OF RECORDS.
9.2.1 Operator shall submit to Franchisor a quarterly Profit and Loss
Statement, signed and certified by Operator. The Profit and Loss Statement shall
be prepared by a Certified or Public Accountant, in accordance with generally
accepted accounting principles, and shall provide Operator's sales, expenses and
financial status with respect to Operator's System Restaurant. Operator shall
submit to Franchisor a copy of the original signed 1120 or 1120S tax form each
and every year or any other forms which take the place of the 1120 or 1120S
forms. Operator shall also provide Franchisor with copies of signed original
sales and use tax forms contemporaneously with their filing with the appropriate
state or local authority. Franchisor reserves the right to require such further
information concerning Operator's System Restaurant as Franchisor may from time
to time reasonably request.
9.2.2 Upon 10 days prior written notice, Franchisor, its agents or
representatives may audit Operator's books and records in accordance with
generally accepted standards established by certified public accountants. In
connection with such audit(s) or other operational visits, Operator agrees to
keep its cash receipts records, weekly and monthly control forms, accounts
payable
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records including all payments to Operator's suppliers in its System Restaurant
or at its business office for 3 years after their due date, which records shall
be available for examination by Franchisor or its representative(s), at
Franchisor's request. Without any prior written notice, Franchisor, its agents
or representatives may inspect Operator's entire System Restaurant and
Operator's daily, weekly and monthly statistical information ("Redbook
Information") which is required under the Operational Manual. Operator shall
make such Redbook Information available for such inspections in recognition that
an operational inspection cannot succeed without review of essential statistical
information.
9.2.3 If any audit or other investigation reveals an under-reporting or
under-recording error of 5% or more, then in addition to any other sums due, the
expenses of the audit/inspection shall be borne and paid by Operator upon
billing by Franchisor, plus interest at the highest compound rate authorized by
the state in which the System Restaurant is located, but not to exceed the rate
of 15% per annum.
9.2.4 Operator acknowledges that Franchisor's Operations Department
regularly reviews ongoing operations at System Restaurants to ensure consistency
of products and service and compliance with the Manuals and this Agreement.
Operator therefore agrees to promptly complete and submit all forms requested by
Franchisor's Operations Department, whether on a daily, weekly or monthly basis.
Non-compliance with this obligation constitutes a material violation of this
Agreement.
ARTICLE 10. COVENANT REGARDING OTHER BUSINESS INTERESTS.
10.1 For purposes of this Article only, "Operator" shall mean and include
the individual Operator; Operator's spouse and minor children; Operator's
shareholders, officers, and directors, if Operator is a corporation; and any one
or more partners or participants in Operator, if Operator is a partnership or
joint venture, or members, if Operator is an LLC.
10.2 Operator acknowledges that the Maui Tacos System is unique and
distinctive and has been developed by Franchisor at great effort, time, and
expense, and that Operator has regular and continuing access to valuable and
confidential information, training, and trade secrets regarding the Maui Tacos
System. Operator recognizes its obligations to keep confidential such
information as set forth herein. Operator therefore agrees as follows:
10.2.1 During the term of this Agreement, except with Franchisor's prior
written consent, Operator shall not, in any capacity whatsoever, either directly
or indirectly, individually or as a member of any business organization, engage
in the production or sale at retail or wholesale of any Mexican food product or
any other main course item authorized by Franchisor, now or in the future
approved by Franchisor for use in Operator's System Restaurant, or have any
employment or interest in any firm engaged in the production or sale of such
products.
10.2.2 Upon the termination, expiration or nonrenewal of this Agreement,
or if Operator assigns or transfers its interest herein to any person or
business entity, or if any person identified in the first paragraph of this
Article terminates its relationship with Operator, then for a period of 60
months thereafter such Operator shall not, in any capacity whatsoever, either
directly or indirectly,
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individually or as a member of any business organization, engage in the
production or sale at retail of any Mexican type food product, or have any
employment or interest in any firm engaged in the production or sale at retail
or wholesale of any such products, at a site within a radius of 5 miles of any
of Operator's former System Restaurants or within 5 miles of any other System
Restaurant or Distribution Point then existing, unless Franchisor gives its
prior written consent. If Operator violates the terms of this paragraph,
Operator shall pay to Franchisor, as liquidated damages, an amount equal to
$5,000 per month for each month this covenant is violated, plus 6% of the gross
sales achieved at the site during the continuation of such violation.
10.2.3 In the event any portion of the above covenants violates laws
affecting Operator, or is held invalid or unenforceable in a final judgment to
which Franchisor and Operator are parties, then the maximum legally allowable
restriction permitted by law shall control and bind Operator. Franchisor may at
any time unilaterally reduce the scope of any part of the above covenants, and
Operator shall comply with any such reduced covenant upon receipt of written
notice.
10.3 The provisions of this Article shall not limit, restrain or otherwise
affect any right or cause of action which may accrue to Franchisor for any
infringement of, violation of, or interference with, this Agreement, or
Franchisor's Marks, System, trade secrets, or any other proprietary aspects of
Franchisor's business.
ARTICLE 11. INTERFERENCE WITH EMPLOYMENT RELATIONS.
Without Franchisor's prior written consent, during the term of this
Agreement, Operator shall not employ or seek to employ, directly or indirectly,
any person serving in an executive, managerial or operational position who is at
the time or was at any time during the prior 6 months employed by Franchisor or
any of its subsidiaries. Request for Franchisor's consent shall be sent in
duplicate and addressed in writing to Franchisor's Vice-President of Operations
and to its General Counsel.
ARTICLE 12. SUBFRANCHISORS, SALESMEN.
Inasmuch as this Agreement has not been executed by the Operator at the
office of Franchisor, Franchisor requires certain assurances that this Agreement
has been sold in accordance with applicable laws, rules and regulations.
Accordingly, in order to induce Franchisor to execute this Agreement, Operator
agrees to execute a Rider/Questionnaire to this agreement that acknowledges that
Franchisor is relying upon the acknowledgments, representations and commitments
of Operator that no other salesman, staff member, entity, or associate of
Franchisor has met Operator regarding this franchise sale or the offer and
acceptance thereof other than those set forth therein. The rider shall identify
all sales persons involved in the sales, negotiation and execution of this
Agreement and shall identify the subfranchisor. Franchisor shall be entitled to
rely on the Rider/Questionnaire, and Operator shall be bound by its contents.
ARTICLE 13. LOCAL RESTAURANT MARKETING MANUAL.
Operator acknowledges that Franchisor's local restaurant marketing ("LRM")
manual and other marketing and advertising materials emphasize the
implementation of marketing efforts within
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a mile radius of Operator's System Restaurant. Such references, suggestions and
emphasis do not directly or indirectly grant to Operator a protected market or
other exclusive right within such 3 mile marketing area, but rather reflects the
reality that Operator's local marketing activities should initially be commenced
in the area immediately adjacent to its System Restaurant.
ARTICLE 14. NATURE OF INTEREST, AND TRANSFER.
14.1 GENERAL PROVISIONS.
14.1.1 This Agreement shall inure to the benefit of the successors and
assigns of Franchisor. Franchisor shall have the right to transfer or assign
this Agreement to any person or legal entity who assumes its terms and agrees to
comply with Franchisor's obligations contained herein. Franchisor shall have no
liability for the performance of any obligations contained in this Agreement
after the effective date of such transfer or assignment.
14.1.2 The rights and duties created by this Agreement are personal to
Operator. Accordingly, except as otherwise permitted herein, neither Operator
nor any person with an interest in Operator shall, without Franchisor's prior
written consent, directly or indirectly sell, assign, transfer, convey, give
away, pledge, mortgage, or otherwise encumber any direct or indirect interest in
this Agreement or, if Operator is a partnership, joint venture, LLC or
corporation, any direct or indirect interest in Operator. Any such purported
assignment occurring by operation of law or otherwise without Franchisor's prior
written consent shall constitute a default of this Agreement by Operator, and
shall be null and void. Except in the instance of Operator advertising to sell
its System Restaurant pursuant to the terms hereof, Operator shall not, without
Franchisor's prior written consent, offer for sale or transfer at public or
private auction or advertise publicly for sale or transfer, the furnishings,
interior and exterior decor items, supplies, fixtures, equipment, Operator's
sublease or the real or personal property used in connection with Operator's
System Restaurant.
14.2 CONSENT TO TRANSFER.
14.2 For all proposed transfers or assignments of this Agreement, and
transfers of more than 51% of the outstanding and issued stock of Operator by
one or more transfers or any transfer which, directly or indirectly, effectively
changes management control of Operator, Franchisor will not unreasonably
withhold its consent to any transfer or assignment which is subject to the
restrictions of this Article, provided however, Franchisor shall not be required
to give its consent unless all of the following conditions are met prior to the
effective date of assignment:
14.2.1 Upon the execution of this Agreement and upon each direct or
indirect transfer of an interest in this Agreement or in Operator and at any
other time upon Franchisor's request, Operator shall, within 5 days prior to
such transfer or at any other time at Franchisor's request, furnish Franchisor
with an estoppel agreement indicating any and all causes of action, if any, that
Operator may have against Franchisor or if none exist and a list of all
shareholders or partners having an interest in this Agreement or in Operator,
the percentage interest of each shareholder or partner, and a list of all
officers and directors, in such form as Franchisor may require.
14.2.2 Operator's written request for transfer of either a partial or
whole interest in this
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Agreement or Operator's System Restaurant must be accompanied by an offer to
Franchisor of a right of first refusal at the same price offered by any bona
fide buyer less 5% percent Franchisor shall have the right and option,
exercisable within 15 days after receipt of such written notification, to send
written notice to Operator or such person that Franchisor or its third-party
designee, intends to purchase the interest which is proposed to be transferred,
on the same terms and conditions offered by the third party. If Franchisor
accepts such offer, the 5% transfer/administrative fee due by Operator in
accordance with Article 3 shall be waived by Franchisor. Any material change in
the terms of an offer prior to closing shall cause it to be deemed a new offer,
subject to the same right of first refusal by Franchisor, or its third-party
designee, as in the case of the initial offer. Franchisor's failure to exercise
such option shall not constitute a waiver of any other provision of this
Agreement, including any of the requirements of this Article with respect to the
proposed transfer.
14.2.3 The Operator is not in default under the terms of this Agreement,
the Manuals or any other obligations owed Franchisor, and all of its then-due
monetary obligations to Franchisor have been paid in full.
14.2.4 The Operator and its shareholders or members, if the Operator is a
corporation or limited liability company, have executed a general release under
seal, in a form prescribed by Franchisor, of any and all claims against
Franchisor, its affiliates, subsidiaries, shareholders, directors, officers,
subfranchisors and employees.
14.2.5 The transferee/assignee has demonstrated to Franchisor's
satisfaction that it meets all of Franchisor's then-current requirements for new
operators or for holders of an interest in a franchise, including, without
limitation, possession of good moral character and reputation, satisfactory
credit ratings, acceptable business qualifications, and the ability to fully
comply with the terms of this Agreement.
14.2.6 The transferee/assignee has assumed this Agreement by a written
assumption agreement approved by Franchisor, or has agreed to do so at closing,
and at closing executes an assumption agreement approved by Franchisor.
14.2.7 The transferee/assignee, its manager or other employees responsible
for the operation of the System Restaurant have satisfactorily completed
Franchisor's training program.
14.2.8 The transferee/assignee executes such other documents as Franchisor
may require, including a replacement franchise agreement on the then-standard
franchise agreement form used by Franchisor, in order to assume all of the
obligations of this Agreement, to the same extent, and with the same effect, as
previously assumed by the assignor.
14.2.9 At the completion of Operator's sale transaction, Operator shall
pay to Franchisor an administrative/transfer fee of 5% of the gross selling
price of Operators System Restaurant or in the event of a nonsale management
transfer, a fee of $1,500 to cover Franchisor's training expenses. This five 5%
administrative transfer fee will not be due with respect to any transfer that
(together with all other related previous, simultaneous, or proposed transfers)
does not result in the transfer of control of Operator.
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14.2.10 Operator's rights may pass to Operator's next of kin or legatee if
they assume Operator's obligations and attend and complete Franchisor's training
program. Upon Operator's disability, Operator may sell the franchise or keep it,
if operated by trained personnel.
14.2.11 Franchisor's consent to a transfer shall not constitute a waiver
of any claims it may have against the transferring party arising out of this
Agreement or otherwise.
14.2.12 If Operator is an individual, Franchisor hereby consents to the
assignment of this Agreement and any and all obligations referable thereto
without any fee charged by Franchisor to a corporation principally owned by
Operator within 90 days from the date hereof. Upon such assignment and
assumption by the corporation along with delivery of executed originals of same
to Franchisor, the individual Operator shall be released from any and all
personal liability.
ARTICLE 15. TERM, DEFAULT AND TERMINATION.
15.1 TERM.
15.1.1 Provided Operator is not in default of the terms and conditions
contained in its Location sublease and this Agreement, this Agreement shall
continue for a period of 20 years or for any longer period coterminous with the
term of the Location sublease.
15.1.2 Operator may renew the rights granted by this Agreement for 4
additional terms of 5 years each, subject to the following conditions:
15.1.2.1 Operator gives Franchisor written notice of Operator's election
to renew not less than 6 and not more than 24 months before the end of the then
current term;
15.1.2.2 Operator is not in default of any provision of this Agreement or
any amendments to this Agreement, the Location sublease, the Manuals or any
monetary obligation owed to Franchisor or its affiliates; and
15.1.2.3 At Franchisor's request, Operator shall undertake and complete
the reasonable renovation or modernization of its System Restaurant.
15.1.2.4 Operator shall execute Franchisor's then-current franchise
agreement and related agreements.
15.2 DEFAULTS WITHOUT OPPORTUNITY TO CURE.
Operator shall be in default and Franchisor may, at its option, upon 30 days
written notice to Operator, terminate this Agreement and all rights granted by
it, without affording Operator any opportunity to cure the default, upon the
occurrence of any of the following events:
15.2.1 Operator's knowingly or intentionally maintaining false books or
records, or submitting any false report or payment to Franchisor;
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15.2.2 Operator's conduct of the System Restaurant licensed pursuant to
this Agreement is so contrary to this Agreement, the System and the Manuals as
to constitute an imminent danger to the public health (for example, selling
spoiled food knowing that the food products are spoiled or allowing a dangerous
condition arising from a lack of security for customers to continue despite
Operator's knowledge of such condition), or selling regularly unauthorized
products to the public after notice of default and continuing to sell such
products whether or not Operator has cured the default after one or more
notices;
15.2.3 The conviction of a felony, or a crime involving moral turpitude,
or any other crime or offense that is reasonably likely, in the sole reasonable
opinion of Franchisor, to adversely affect the System, Franchisor's Marks; the
goodwill associated with the System or Franchisor's interest in each of them by
Operator's, or its controlling or operating shareholders or members if Operator
is a limited liability company, or Operator's partners if Operator is a
partnership, excluding non-managing partners
15.2.4 Operator's intentional disclosure or use of the contents of the
Manual, trade secrets or confidential or proprietary information provided to
Operator by Franchisor in violation of this Agreement, excluding acts of
independent employees or others not under Operator's control; or
15.2.5 If Operator repeatedly commits defaults under any provisions of
this Agreement 8 or more occasions in any 12 month period, or 16 or more
occasions in any consecutive 24 month period, even if Operator cured each such
prior default, and even if Operator would otherwise be given an opportunity to
cure the current default.
15.2.6 Operator's, without Franchisor's consent, ceasing to operate or
otherwise abandoning its System Restaurant or, upon destruction of its System
Restaurant, failure to rebuild and resume operation within a reasonable time.
Cessation of the business shall not constitute a default under this Agreement if
caused by condemnation, expiration of a Location lease pursuant to its terms at
execution, natural, governmental or supplier related causes out of Operator's
control, or when failure to rebuild following destruction of the System
Restaurant is prohibited by law or the Location lease. In the event of
termination pursuant to this subsection 15.2.6, the written notice period shall
commence five days from the date Franchisor sends written notice to Operator. At
the expiration of this time period, this Agreement shall be deemed terminated.
For purposes of this article, ceasing to operate or otherwise abandoning its
System Restaurant shall be defined as Operator's failure to open its Maui Tacos
Restaurant for business for five consecutive days.
15.3 DEFAULTS WITH OPPORTUNITY TO CURE.
15.3.1 Except as otherwise provided in this Agreement, Operator shall have
10 days after Franchisor's written notice of default within which to remedy any
default under this Agreement, and to provide evidence of such remedy to
Franchisor. If any such default is not cured within that time period, or such
longer time period as applicable law may require, Franchisor may, at its option,
terminate this Agreement and all rights granted by it, by sending a 5 day
written notice of cancellation of this Agreement to Operator. Upon the
expiration of such 5 day period, this Agreement shall end and expire as if it
were the day fixed for termination of this Agreement.
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15.3.2 Operator shall be in material default under this Article for any
failure to comply with any of the requirements imposed by this Agreement. Such
material defaults shall include, without limitation, the occurrence of any of
the following events:
15.3.2.1 Operator's failure, refusal, or neglect to promptly pay any
monies owed to Franchisor, its subsidiaries or affiliates, when due, or to
submit the financial or other information required by Franchisor under this
Agreement.
15.3.2.2 Operator's failure to maintain the standards specified by
Franchisor in the Manual or otherwise.
15.3.2.3 Operator's failure, refusal or neglect to obtain Franchisor's
prior written approval or consent as required by this Agreement.
15.3.2.4 Operator's misuse or unauthorized use of Franchisor's Marks or
other material impairment of the goodwill associated therewith or Franchisor's
rights therein.
15.3.2.5 Operator's commencement or conducting of any business operation,
or marketing of any product, under a name or mark which, in Franchisor's
reasonable opinion, is confusingly similar to Franchisor's Marks.
15.3.2.6. Operator's default, without cure after the applicable grace
period, under any lease, sublease, sub-sublease, mortgage, or deed of trust
covering the Location.
15.3.2.7 Operator's failure to procure or maintain the insurance required
by this Agreement or in the lease and sublease for the Location.
15.3.2.8 Operator's default in the performance of any term, condition or
obligation in payment of any indebtedness to its landlord or sublandlord,
distributors or suppliers or others arising out of the purchase of inventory,
supplies or purchase or lease of equipment for operation of its System
Restaurant, and if any such default is not cured within 30 days after written
notice by Franchisor to Operator, unless Operator is determined by a court of
competent jurisdiction to be not in default.
15.4 In the event of a default by Operator, all of Franchisor's costs and
expenses arising from such default, including reasonable legal fees and
reasonable hourly charges of Franchisor's administrative employees shall be paid
to Franchisor by Operator within 5 days after cure.
15.5 Notwithstanding the obligations of Operator and Franchisor to
arbitrate all disputes and other conflicts, Operator and Franchisor acknowledge
that certain defaults require immediate action to protect the appropriate party.
Accordingly, Franchisor and Operator each hereby consent to and authorize the
other party to apply to any court of competent jurisdiction for judicial
assistance in restraining and enjoining violations of this Agreement. Both
Franchisor or Operator are entitled to an injunction restraining Franchisor or
Operator from committing or continuing to commit any default, breach or
threatened breach of this Agreement, without showing or proving any actual
damage sustained by the party seeking such relief.
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15.6 Non-enforcement by Franchisor of any violation of the terms of this
Agreement by Operator shall not constitute a waiver of such violation by
Franchisor nor shall Franchisor be deemed to have waived any of its rights to
enforce compliance by Operator of such breach or any other breach of this
Agreement.
ARTICLE 16. RIGHTS AND OBLIGATIONS UPON TERMINATION.
Upon the termination of Operator's rights granted under this Agreement, (whether
during the term of the Agreement or at its conclusion) the following apply:
16.1 Upon termination of this Agreement by lapse of time or by default,
Operator's right to use Franchisor's Marks, or any other mark distributed by
Franchisor or insignia or slogan used in connection therewith, or any
confusingly similar trademark, service mark, trade name or insignia shall cease.
Operator shall immediately discontinue use of Franchisor's Marks, System, and
color scheme. Operator shall at its own cost, make cosmetic changes to
Operator's System Restaurant from Franchisor's proprietary designs including,
but not limited to, the removal of all Maui Tacos identifying materials and
distinctive Maui Tacos cosmetic finishes, tile walls, interior wall coverings
and colors, exterior finishes and colors, signage and Maui Tacos counter
equipment (which shall be deemed proprietary to Franchisor) from the Location as
Franchisor may reasonably direct.
16.2 Franchisor may retain all fees paid pursuant to this Agreement.
16.3 Any and all obligations of Franchisor to Operator under this
Agreement shall immediately cease and terminate.
16.4 Any and all rights of Operator under this Agreement shall immediately
cease and terminate.
16.5 In no event shall a termination or expiration of this Agreement
affect Operator's obligations to take or abstain from taking any action in
accordance with this Agreement. The provisions of this Agreement which
constitute post-termination covenants and agreements including the obligation of
Franchisor and Operator to arbitrate any and all disputes shall survive the
termination or expiration of this Agreement.
16.6 Operator acknowledges and agrees that rights in and to Franchisor's
Marks and the use thereof shall be and remain the property of Franchisor.
16.7 If Operator has registered any of Franchisor's Marks or the name
"Maui Tacos" as part of Operator's assumed, fictitious or corporate name,
Operator shall promptly amend such registration to delete Franchisor's Marks
therefrom.
16.8 Operator shall immediately pay any and all amounts owing to
Franchisor, its subsidiaries and affiliates.
16.9 Franchisor shall have the option, exercisable by written notice
within 30 days after
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the termination of this Agreement, to take an assignment of all telephone
numbers (and associated listings) for Operator's System Restaurant. Operator is
not entitled to any compensation from Franchisor if Franchisor exercises this
option.
ARTICLE 17. INSURANCE.
17.1 Operator shall obtain and maintain insurance coverage which shall in
each instance designate Franchisor, and its subsidiaries, as an additional named
insured, with an insurance company approved by Franchisor, which approval shall
not be unreasonably withheld as follows:
17.1.1 Comprehensive general liability insurance (including products
liability and sexual harassment coverage); with coverage of $1,000,000 to
$3,000,000 combined single limit for death, personal injury, and $100,000
property damage coverage.
17.1.2 Business interruption insurance, including Location rentals and
Additional Rentals for 12 months after casualty, in amounts equal to at least
$100,000.
17.1.3 Workers' compensation insurance (coverage B) as required by
applicable law.
17.1.4 Fire, and extended coverage insurance, insuring the construction of
improvements and completed System Restaurant operated by Operator, for the full
replacement value thereof.
17.1.5 If Operator establishes a delivery service for Authorized Products,
Operator shall obtain separate non-owned auto coverage insurance. Operator may
not directly or indirectly deliver any Authorized Products until such insurance
is obtained and Franchisor named as additional insured therein.
17.2 In the event of damage to the System Restaurant covered by insurance,
the proceeds of any such insurance shall be used to restore the System
Restaurant to its original condition as soon as possible, unless such
restoration is prohibited by the Location lease or Franchisor has otherwise
consented to in writing. Upon obtaining such insurance, Operator shall promptly
provide to Franchisor proof of such insurance coverage and/or at such other
times upon the request of Franchisor.
17.3 Operator shall, prior to opening its System Restaurant, file with
Franchisor, certificates of such insurance and shall promptly pay all premiums
on the policies as they become due. In addition, the policies shall contain a
provision requiring 30 days prior written notice to Franchisor of any proposed
cancellation, modification, or termination of insurance. If Operator fails to
obtain and maintain the required insurance, Franchisor may, at its option, in
addition to any other rights it may have, procure such insurance for Operator
without notice and Operator shall pay, upon demand, the premiums and
Franchisor's costs in taking such action.
ARTICLE 18. SOLE OBLIGATIONS OF FRANCHISOR.
18.1 As described in Franchisor's Uniform Franchise Offering Circular (the
"UFOC"), received by Operator at least 10 business days prior to the execution
of this Agreement, Franchisor
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has obligated itself to provide specific services to Operator. Franchisor also
provides other voluntary services at its sole discretion. Franchisor and
Operator agree that the following are the only required obligations of
Franchisor:
18.1.1 To approve the Location of Operator.
18.1.2 To reasonably assist Operator with any operational or financial
problem encountered by Operator, after notice to Franchisor in duplicate sent
to: (i) Franchisor c/o General Counsel, 740 Broadway - 12th Floor, New York, New
York 10003; and (ii) Vice President - Operations, 1775 The Exchange, Suite 540,
Atlanta, Georgia 30339 by certified mail (return receipt requested) or at any
subsequent addresses established by Franchisor, of Operator's problem and the
type of assistance needed. At no time shall reasonable assistance be interpreted
to require Franchisor to pay any money to Operator. Franchisor, in its sole
discretion, may provide any assistance at Franchisor's designated office or
where Operator is located, at a time to be determined by Franchisor.
18.1.3 To reasonably administer to the advertising program. Operator
acknowledges that pursuant to the advice of advertising and marketing
professionals, advertising collections will at times be aggregated until
sufficient revenues are accumulated to commence or complete an advertising or
marketing program. Reasonable administration shall be deemed to be good faith
attempts to utilize the advertising funds in accordance with the advice and
suggestions of the advertising and marketing staff or outside advertising and/or
marketing companies, consultants or other entities retained for such purpose.
18.1.4 To assist Operator in arranging for the initial financing of its
System Restaurant, if feasible and necessary (Franchisor is not directly or
indirectly responsible for the failure of Operator to meet the qualifying
standards of such independent financing sources).
18.1.5 To supply to Operator a set of standard decor and layout plans and
to thereafter approve the initial decor and layout of Operator's System
Restaurant.
18.1.6 To loan Operator a copy of its Operations Manual or computer
diskette thereof which manual contains mandatory and suggested specifications,
standards and procedures. This Manual is confidential and remains Franchisor's
property.
18.1.7 To train Operator in accordance with Article 3 herein, and to
provide representatives of Franchisor to assist in opening the System
Restaurant.
18.2 Franchisor shall not and cannot be held in breach of this Agreement
until (i) Franchisor has received notice of any alleged breach from Operator in
duplicate, by registered mail, sent to the parties set forth in paragraph 2 of
this Article; and (ii) Franchisor has failed to remedy the breach within a
reasonable period of time after such notice, which period shall not be less than
60 days. This is a material term of this Agreement and may not be modified or
changed by any arbitrator in an arbitration proceeding or otherwise in any court
of competent jurisdiction.
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ARTICLE 19. POINT OF SALE SYSTEM, COLLECTION OF DATA.
19.1 This Agreement and the Manuals require the submission of weekly
statistical control forms as well as other financial, operational and
statistical information required by Operator and Franchisor to: (i) assist
Operator in the operation of its System Restaurant in accordance with the
System; (ii) allow Franchisor to monitor the Operator's gross sales, purchases,
costs and expenses; (iii) enable Franchisor to develop chainwide statistics
which may improve bulk purchasing; (iv) assist Franchisor in the development of
new authorized products or the removal of existing unsuccessful Authorized
Products; (v) enable Franchisor to refine existing Authorized Products; (vi)
generally improve chainwide understanding of the System; and (vii) obtain new
types of information unknown at this time (collectively, the "Information"). To
achieve these results, cash collection and data processing systems are
necessary.
19.2 Operator agrees to purchase and use the point of sale cash collection
and data processing system (the "POS System") and only the specified software
authorized by Franchisor, as specified in the Construction and Equipment Manual
or otherwise by Franchisor in writing. The POS System includes a PC based cash
register, register tape printer, magnetic stripe reader, cash drawer, defined
Franchisor polling and register software and telecommunications equipment.
19.3 Operator agrees to (i) connect the POS System to Operator's telephone
line(s); (ii) maintain it in good working order; and (iii) not disconnect any
POS System connection or phone line at any time, for any reason, without prior
written approval. Operator agrees, at Franchisor's request, to maintain
membership in a designated third party network (such as Compuserve, AOL,
Prodigy, etc.) for the purpose of implementing, transmitting, collecting and
maintaining any Information or data exchange system. Operator specifically
authorizes Franchisor to either "upload" or "download" information in and from
or to its computers, cash registers or other such devices as allowed by law, as
it relates to the System Operation by internet, intranet, and other networks or
other means as they become available.
19.4 Operator agrees to pay to Franchisor up to $13 weekly (subject to
reasonable annual increases) in the manner provided under Article 9 herein, for
support service for the POS System software during the term of its franchise and
any renewals. This fee will be collected by Franchisor for payment to 1 or more
3rd party suppliers who are designated by Franchisor to provide the support
service. The 3rd party suppliers will provide 24-hour telephone support and
annual maintenance for any upgrades and enhancements that they make to the
required POS System software. Franchisor may cancel this service on 30 days'
written notice to Operator, and may resume these services at any time with any
supplier Franchisor chooses. Franchisor may revise the POS System
specifications. Operator may be required to upgrade or update its POS System
recording system. On Franchisor's request, Operator must apply for and maintain
debit card, credit card or other non-cash payment systems to enable customers to
purchase products through these procedures. There is no contractual limitation
on Franchisor's right to receive information through the POS System.
ARTICLE 20. RELATIONSHIP OF PARTIES, DISCLOSURE.
20.1 Franchisor and Operator are not and shall not be considered joint
ventures, partners,
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or agents of each other, or anything other than Franchisor and Operator, and
neither shall have the power to bind or obligate the other except specifically
as set forth in this Agreement. Franchisor and Operator agree that the
relationship created by this Agreement is not a fiduciary relationship. Operator
shall not, under any circumstances, act or hold itself out as an agent or
representative of Franchisor. Operator agrees to indemnify and hold Franchisor
harmless from any claims, demands, liabilities, actions suits or proceedings
asserted by third parties arising out of the operation of Operator's System
Restaurant or Operator's breach of any of the terms of this Agreement.
Franchisor agrees to indemnify and hold Operator harmless from any claims,
demands, liabilities, actions suits or proceedings asserted by third parties and
arising out of Franchisor's operations unless caused by Operator.
20.2 As set forth in the UFOC delivered to Operator as described above,
Operator acknowledges that Franchisor has entered into certain subfranchise
agreements with subfranchisors and/or area developers in certain areas and
territories. Pursuant to these contracts, the subfranchisors of Franchisor are
obligated to provide certain sales, operational and support services for
Franchisor. Operator acknowledges that the relationship between Franchisor and
all of its subfranchisors and/or area developers is strictly contractual and
that no subfranchisor and/or area developer is an agent of Franchisor.
Accordingly, Operator acknowledges and agrees that any past, current or future
subfranchisor is not the actual, express or implied agent of Franchisor, and has
no power or authority to: (i) act on Franchisor's behalf; (ii) enter into or
execute any agreement on Franchisor's behalf; (iii) make any representation or
promise on Franchisor's behalf; or (iv) bind Franchisor in any way. Unless
otherwise specifically agreed to in writing, Franchisor expressly disavows any
acts by others, including subfranchisors, that purport to bind Franchisor in any
way. Operator agrees to waive any claim or defense in any litigation or
arbitration proceeding that a subfranchisor is the express or implied agent of
Franchisor. Operator agrees that any attempt to raise, assert or justify such
claim or defense in any proceeding constitutes a material default of this
Agreement.
20.3 Articles have been published about Maui Tacos, specifically one
entitled Beach Blanket Burrito which appeared in the December 1998 issue of The
Chain Leader and the other entitled Hawaiian Style Mexican Hits the Mainland
with Maui Tacos which appeared in the November 23, 1998 issue of Nation's
Restaurant News (the "Printed Articles"). These Printed Articles as written may
not be delivered to you by Franchisor as that may violate existing franchise
laws, and if improperly delivered, Franchisor will not execute a franchise
agreement until the violation is cured.
ARTICLE 21. DISPUTE RESOLUTION:
ARBITRATION AND LEGAL PROCEEDINGS.
21.1 Franchisor and Operator acknowledge that disputes or disagreements
may arise during the term of this Agreement and any renewals thereto. Franchisor
and Operator have elected to resolve such disputes or disagreements in a
non-judicial alternative dispute resolution format ("ADR"). An ADR format
minimizes the expense of dispute resolution and generally can be accomplished in
a more expeditious and effective manner. By agreeing to an ADR format, both
Operator and Franchisor are also waiving a number of rights, remedies and
privileges which may arise in a judicial resolution format. In view, however, of
the continuing relationship between Operator and Franchisor over the original
and renewal terms of this Agreement, both Operator and
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Franchisor agree that an ADR format is the most economical, efficient and
practical way to resolve disputes and disagreements.
21.2 Accordingly, except as otherwise provided in this Agreement, in the
event of any dispute or disagreement between Franchisor and Operator with
respect to any issue arising out of or relating to this Agreement, its breach,
its interpretation or any other disagreement between Operator and Franchisor,
such dispute or disagreement shall be resolved by arbitration. In the event of
any dispute or disagreement, Operator and Franchisor both agree to submit the
dispute to arbitration in accordance with the least expensive procedure of the
American Arbitration Association ("AAA"), and the application for such
arbitration shall be filed in the AAA's New York City office. Franchisor and
Operator agree that the hearing(s) shall be held in New York City, State of New
York before one arbitrator. This paragraph shall not apply to any monetary
defaults of Operator, including Operator's obligation to pay franchise and
advertising fees to Franchisor, as to which Franchisor shall be free to utilize
any right or remedy it may have at law or equity.
21.3 Franchisor and Operator agree that this Agreement evidences a
transaction involving interstate commerce and that the enforcement of this
arbitration provision and the confirmation of any award issued to either party
by reason of an arbitration conducted pursuant to this arbitration provision is
governed by the Federal Arbitration Act, 9 U.S.C. ss. 1 et seq.
21.4 Punitive or exemplary damages or attorney's fees may not be awarded
by the arbitrator(s), and any such award shall not be enforceable or enforced by
any court. Except as otherwise provided, each party shall bear its own
attorney's fees, expert witness fees, and other court costs incurred in
connection with any legal action or arbitration between Franchisor and Operator.
If the waiver of punitive or exemplary damages or legal fees and related costs
are in violation of the laws of the state where the Operator's System Restaurant
is located, such claims may be awarded by the arbitrator(s), and any such award
shall be enforceable or enforced in any court of appropriate jurisdiction. This
agreement shall be strictly construed in the arbitration hearing. In no event
can the material provisions of this Agreement including, but not limited to the
method of operation, Authorized Product line or monetary obligations specified
in this Agreement, amendments to this Agreement or in the Manuals be modified or
changed by the arbitrator at the arbitration hearing.
21.5 Except for injunctive relief (including temporary restraining orders,
preliminary injunctions and injunctions or similar relief which must be brought
in an appropriate local forum), any legal proceeding authorized by this
Agreement shall be commenced only in the Federal District Court for the Southern
District of New York and both Franchisor and Operator consent to the
jurisdiction in the Federal District Court for the Southern District of New
York. In the event the parties do not meet the jurisdictional requirements for
Federal Court, the parties consent to jurisdiction in the Supreme Court, New
York County, State of New York. Operator agrees that mailing to its last known
address by certified mail of any process shall constitute lawful and valid
process. In all cases, Operator and Franchisor each waives any right to a trial
by jury. Notwithstanding the foregoing, if the laws of the state where
Operator's System Restaurant is located requires jurisdiction of the courts of
that state or control by the laws of that state, then this Agreement shall be
deemed modified to comply with the applicable laws thereto.
21.6 The terms of this article shall survive termination, expiration or
cancellation of this
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Agreement.
ARTICLE 22. EXECUTION, REQUESTS, CONSENTS AND WAIVERS.
22.1 This Agreement takes effect upon its acceptance and execution by
Operator and Franchisor, and shall be governed by and construed in accordance
with the laws of the State of New York, USA. Franchisor will consider written
requests by Operator for Franchisor's consent to a waiver of any obligation
imposed by this Agreement. Operator agrees, however, that Franchisor is not
required to act uniformly with respect to waivers, requests and consents as each
request will be considered on a case by case basis, and nothing shall be
construed to require Franchisor to grant any such request. Any waiver granted by
Franchisor shall be without prejudice to any other rights Franchisor may have,
will be subject to continuing review by Franchisor, and may be revoked, in
Franchisor's sole discretion, at any time and for any reason, effective upon 10
days prior written notice to Operator. Franchisor makes no warranties or
guarantees upon which Operator may rely, and assumes no liability or obligation
to Operator by providing any waiver, approval, consent, assistance, or
suggestion to Operator in connection with this Agreement, or by reason of any
neglect, delay, or denial of any request.
22.2 Unless otherwise provided, whenever this Agreement requires Operator
to obtain Franchisor's prior written consent, Operator shall timely address its
written request for such consent in duplicate to the parties set forth in
paragraph 2 of Article 18 or such other persons as Franchisor may designate in
writing. Franchisor will then consider such request and advise Operator of the
decision, in writing, within 45 days. Franchisor's failure to advise Operator
will constitute Franchisor's consent to such request. The 45 day period shall
not begin to run, however, until Operator has provided Franchisor with all
information and documentation requested by Franchisor. Neither Operator nor
Franchisor shall be deemed to have waived or impaired any right, power or option
reserved by this Agreement, including, without limitation, its right to demand
strict compliance with every term, condition, and covenant herein, or to declare
any breach thereof a default and to terminate this Agreement prior to the
expiration of its term, by virtue of any custom or practice of the parties at
variance with the terms hereof; by any forbearance, delay, failure, or omission
to exercise any right, power, or option, whether of the same, similar, or
different nature, against Franchisor, Operator, or any other operator; or by the
acceptance of any payments due after any breach of this Agreement.
ARTICLE 23. MISCELLANEOUS PROVISIONS.
23.1 This Agreement may be executed in any number of counterparts, each of
which, when so executed and delivered, shall be deemed an original, but such
counterparts together shall constitute but one and the same instrument.
23.2 This Agreement (as further explained in the UFOC) contains the entire
agreement of the parties and cannot be modified, changed or amended except in
writing and signed by Franchisor.
23.3 There is no other agreement, representation or warranty made by
Franchisor or any other entity or person associated with Franchisor other than
contained in this Agreement. This Agreement is not subject to or conditioned
upon the obtaining of a Location for Operator's System
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Restaurant.
23.4 Except as otherwise provided, each party shall bear its own
attorney's fees arising from the negotiations and execution or lack of execution
of this Agreement.
23.5 Each article, paragraph, subparagraph, term, and condition of this
Agreement shall be considered severable. If for any reason, any portion of this
Agreement is determined to be invalid or in conflict with any law or rule in a
final ruling issued by any court, agency, or tribunal with valid jurisdiction in
a proceeding to which Franchisor is a party, that ruling shall not effect the
validity or enforceability of any other portion of this Agreement.
23.6 All notices to Franchisor required by the terms of this Agreement,
unless otherwise provided, shall be sent by certified or registered mail or by
overnight delivery service, addressed to the parties set forth in this
Agreement, or at such other address as Franchisor designates. All notices to
Operator required by the terms of this Agreement shall be sent by certified or
registered mail or by overnight delivery service, addressed to Operator at the
Location, or at such other or additional address as Operator designates in
writing. If Operator refuses acceptance of any certified, registered or
overnight delivery, acceptance shall be deemed to have occurred 48 hours after
rejection of such notice.
23.7 Operator acknowledges that the evolution of the System requires the
development of Nontraditional Maui Tacos Restaurants, Maui Tacos Distribution
Points and Branded Products.
23.8 For the purpose of this article, a co-brand shall be defined as an
independent operating system owned by another entity (not Franchisor) that is
incorporated as an operational part within the Operator's System Restaurant. An
example would be an independent ice cream/yogurt operation installed within
Operator's System Restaurant. Subject to Franchisor's prior written approval,
Operator may install approved co-branding marketing systems to be operated in
conjunction with Operator's System Restaurant. Franchisor shall not be required
to approve any co-branding marketing system unless Franchisor has recognized
that co-branding system as an approved co-brand for operation within its system
restaurants, either nationally or regionally. Inasmuch as Operator and its
employees will be incorporating the co-brand within its System Restaurant, all
sales of the co-brand shall be included within the definition of "gross sales"
as defined in Article 9 herein and Operator shall pay to Franchisor franchise
and advertising fees for such sales.
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IN WITNESS WHEREOF, the parties hereof have executed this Agreement as of
the date of execution by Franchisor.
MAUI TACOS INTERNATIONAL, INC.
__________________________ By:_______________________________________
Date of Execution Vice President
Franchisee Name
Executed as of the date first
above written. By:_______________________________________
Individual Name, Individual Title
By execution of this Agreement, the undersigned stockholder(s) of the corporate
Operator, or members of the LLC, or the individual Operator hereby personally
accepts and agrees to comply with Article 10 of this Agreement and acknowledges
that the Franchisor has executed this Agreement in reliance upon the commitments
contained in this Paragraph.
__________________________________________
Individual Name
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Exhibit 10.46
AREA DEVELOPER SUBFRANCHISE AGREEMENT
AGREEMENT, made as of the day of Month, _____ by and between Maui Tacos
International, Inc., a Georgia corporation, located at 1775 The Exchange, Suite
540, Atlanta, Georgia 30339 and 740 Broadway, 12th Floor, New York, New York
10003 (hereinafter the "Franchisor") and Subfranchisor Corp. Name located at
Subfranchisor Address (hereinafter referred to as the "Subfranchisor").
W I T N E S S E T H:
WHEREAS, Franchisor, its subsidiaries and its affiliates have acquired,
developed and innovated unique methods of merchandising, promotion, production,
quality control and distribution of Mexican-type food products and clothing for
the franchised operation of Maui Tacos Restaurants under the trademark and trade
name of "Maui Tacos" (the "Trademarks") as described in Franchisor's Maui Tacos
International, Inc. 1999 Maui Tacos Subfranchise Uniform Franchise Offering
Circular (the "Subfranchise UFOC") which has been previously received by
Subfranchisor; and
WHEREAS, Subfranchisor acknowledges receipt on ___________ (the
"Disclosure Date") of the Subfranchise UFOC and Franchise UFOC; and
WHEREAS, Franchisor is authorized to issue Maui Tacos subfranchise
agreements and Maui Tacos Restaurant franchise agreements in the State of Insert
State including the Counties of ________________________________ (approximate
population ____________); and
WHEREAS, Franchisor awards Maui Tacos Restaurant franchise agreements for
traditional and non-traditional Maui Tacos Restaurants. Non-traditional Maui
Tacos Restaurants shall be deemed to be Maui Tacos Restaurants installed within
another primary business such as colleges, universities, convenience stores,
supermarkets, hospitals, department stores, etc. Traditional Maui Tacos
Restaurants are generally developed via the execution of a lease for the Maui
Tacos Restaurant premises by a subsidiary leasing corporation of the Franchisor
which is subleased to the approved Maui Tacos Restaurant franchisee.
Nontraditional Maui Tacos Restaurants are developed by the execution of a
standard Maui Tacos Restaurant nontraditional franchise agreement without the
execution of a lease for the Maui Tacos Restaurant premises, except in certain
circumstances when a lease is obtained; and
WHEREAS, pursuant to this agreement and as described in the Subfranchise
UFOC, Subfranchisor is obligated to provide to Maui Tacos Restaurants support
services on behalf of Franchisor including, but not limited to, assistance in
the nature of consultation, advice and guidance regarding location selection,
lease negotiations, construction coordination, "Grand Openings", store training,
marketing advice and implementation, promotions, point of sale purchases or any
other administrative tasks designated by Franchisor as support programs that
need to be implemented for proper management of the Territory (collectively the
"Support Services"); and
<PAGE>
WHEREAS, it is the desire of Subfranchisor to become a regional support
entity to provide the Support Services in the Territory required by Franchisor
in order to receive a portion of the initial and continuing franchise fees
received from each franchisee in the Territory as hereinafter described and in
the Subfranchise UFOC; and
WHEREAS, Franchisor is willing to sell and grant to Subfranchisor, a
subfranchise agreement, under the terms and conditions set forth herein for the
Counties of _______________, State of ______________ (hereinafter the
"Territory"); and
WHEREAS, after consultation with independent counsel and a diligent
investigation of all available information, Subfranchisor is willing to purchase
and receive a grant by Franchisor of a subfranchise agreement, under the terms
and conditions set forth herein for the Territory.
NOW, THEREFORE, in consideration of the mutual promises and covenants, it
is mutually agreed as follows:
1. CONSIDERATION:
In consideration of Franchisor's execution of this agreement,
Subfranchisor agrees to pay to Franchisor the non-refundable sum of
$____________ (the "Subfranchise Fee") on the date first above written.
2. GRANT OF EXCLUSIVE LICENSE AND SUBFRANCHISE RIGHTS; TERRITORY; TERM:
2.1 The area subject to this agreement shall be the for the Territory defined
above.
2.2 The term of this agreement shall commence simultaneously with the execution
of this agreement by all relevant parties. The term of this agreement shall
continue for a term of ___ years (the "Term") unless terminated as provided for
herein.
2.3 Subject to compliance with the obligations of Subfranchisor as contained
herein and in the UFOC, Franchisor hereby grants and conveys to Subfranchisor
the exclusive right to be a Subfranchisor of Franchisor in the Territory in
connection with the sale of Maui Tacos franchises or branded products in the
Territory or with respect to subfranchise rights to receive Subfranchisor's
portion of the receipts obtained from Maui Tacos franchisees and branded product
sales for the sale of authorized products under the trademark of "Maui Tacos"
and such other associated names, tag lines and slogans as Franchisor may own or
use as described herein and in the UFOC. Notwithstanding the expiration of the
Term, whether by termination, expiration or otherwise, Subfranchisor shall
retain all rights to receive continuing franchise fees from Maui Tacos
Restaurants developed prior to the termination or expiration of the Term,
including any and all franchise agreement renewals or the relocation of Maui
Tacos Restaurants arising from the expiration of their respective leases (but
not for branded products). Nothing contained in this paragraph shall be deemed
(i) to limit or modify the right of Franchisor to terminate this agreement for
any of the defaults set forth herein subject to any and all applicable
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notice and cure rights granted to Subfranchisor; (ii) to issue Maui Tacos
franchise agreements to Maui Tacos franchisees in the Territory; or (iii) to
require the leasing corporations to execute master leases and thereafter grant
subleases to franchisees in the Territory. Franchisor agrees that so long as
this agreement is in full force and effect, Franchisor shall not directly or
indirectly issue another Maui Tacos subfranchise in the Territory or issue a
grant to a third party of any part of Subfranchisor's rights thereof.
3. OBLIGATIONS OF THE FRANCHISOR:
Franchisor promises and covenants as follows:
3.1 To permit Subfranchisor to use the Trademarks, its logotypes and any
other trademarks or service marks which Franchisor may authorize and designate
for use by Subfranchisor, including tag lines and slogans. Subfranchisor upon
Franchisor's request agrees to use the newest trademarks, tag lines and slogans
and other promotional material developed by Franchisor upon the minimum of at
least 30 days prior written notice to Subfranchisor;
3.2 To furnish by lending Subfranchisor as created a copy of the Maui
Tacos Subfranchise, Operations, Local Restaurant Marketing and Construction
Manuals (hereinafter collectively the "Manual(s)"), together with any subsequent
changes or amendments thereto. Subfranchisor agrees not to copy, publish or
duplicate the contents of said Manual except when needed to supply each Maui
Tacos franchisee or for dissemination to the officers and key employees of
Subfranchisor;
3.3 To supply Subfranchisor, free of charge, one complete sample set of
all sales materials and forms, including the standard franchise agreement and
applicable UFOC to be delivered to each prospective franchisee at the first
meeting or ten business days (excluding holidays and weekends) prior to the
execution of a franchise agreement and to be used by Subfranchisor in connection
with the sale of each individual franchise unit. UFOCs, brochures and sales
materials are generally purchased from printers hired for such purposes;
3.4 To make available to Subfranchisor the right to consult in person at
the office of Franchisor or by telephone with Franchisor's officials and staff
in its New York office or at such other location designated by Franchisor about
problems relating to design, construction and operation of franchise units at
the office of Franchisor so that Subfranchisor will have available to it the
experience and expertise of Franchisor. Currently, Franchisor has
executive/legal department offices in New York, New York, accounting, operations
and sales offices in Atlanta, Georgia and construction and equipment offices in
Houston, Texas. Additional or replacement offices may be developed in the future
and the advice and consultation will be provided from the respective offices of
Franchisor;
3.5 To provide a training program for 5 days (40 hours) (or such lesser or
greater periods as established by Franchisor) of classroom instruction and for
120 hours of on-the-job training in an existing Maui Tacos Restaurant in
Atlanta, Georgia or, in Franchisor's sole discretion, in the Territory. The
training program covers the operational and statistical methods of operating a
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Maui Tacos Restaurant and Maui Tacos subfranchise business, franchise sales,
real estate procurement and marketing. Training shall be attended by the
controlling stockholders of Subfranchisor if a corporation, all partners if a
partnership, all individual proprietors if a sole proprietorship, and all
managing executives and operational supervisors, in Atlanta, Georgia. If the
ownership, management or operational supervisor is changed, the new management
or executive(s) must also be trained prior to the commencement of their
responsibilities. Payment of all expenses of training, except for salaries of
Franchisor's staff and operating expenses of Franchisor, are the obligation of
Subfranchisor. All travel, lodging, entertainment and other expenses are solely
that of Subfranchisor. Franchisor shall be responsible for all costs of actual
training including training staff, training facility and the cost of store
operational training; it is acknowledged that subsequent to formal training
there will be continued practical training and education arising between the
Subfranchisor's staff and Franchisor's staff as each confront the problems and
difficulties that arise in the development of the Territory.
3.6 As changes in applicable laws occur, to attempt to inform
Subfranchisor of any applicable federal or state franchise laws. Subfranchisor
acknowledges that such information is generally provided at the semi-annual
subfranchisor meetings sponsored by Franchisor and at the annual convention of
Franchisor. This provision and its compliance or lack thereof shall in no way
release Subfranchisor from its obligation to comply with all applicable laws;
3.7 To pay all bills, invoices, fees and other obligations that may be
owed to Subfranchisor by Franchisor, provided Subfranchisor is in full
compliance with this agreement;
3.8 To coordinate a franchise sales program by providing trained
salesperson(s), satisfactory to Franchisor, to process and sell franchises to
franchisee prospects interested in locating in the Territory obtained by
Subfranchisor or Franchisor. There are no representations, warranties,
commitments or assurances of success by said salesperson(s) and Subfranchisor
agrees to make no claims whatsoever with respect to the success or failure of
Franchisor's salesperson(s) during the Term and any renewal thereof.
3.9 To protect and defend Subfranchisor's right to use, and the validity
of, Franchisor's trademarks; and
3.10 To direct duplicates of sales leads to Subfranchisor so that
Subfranchisor can work with Franchisor's salesmen or process the prospective
sale if one of Franchisor's salesmen is not involved.
4. FRANCHISOR'S REPRESENTATIONS, ETC.:
Franchisor warrants and represents as follows:
4.1 That Franchisor has the right, title and interest to grant the within
agreement and that all rights granted herein to Subfranchisor are free and clear
of any and all liens, claims or encumbrances;
4.2 That Franchisor has the full power and authority to enter into this
agreement and
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that the within agreement and the obligations of Franchisor hereunder does not
conflict with nor result in a breach of any agreement to which Franchisor is a
party of or by which Franchisor is otherwise bound; and
4.3 That Franchisor will protect and defend the rights of Subfranchisor
against third parties claiming a violation of 4.1 and 4.2 and the validity of
the Trademarks at its sole expense.
5. OBLIGATIONS OF THE SUBFRANCHISOR:
Subfranchisor promises and covenants as follows:
5.1 To devote its best efforts to develop and manage the Territory,
including the provision of sales assistance to Franchisor's salesmen, opening
and servicing of all Maui Tacos Restaurants and distribution points in the
Territory, in accordance with the requirements of Franchisor which (except for
the development requirements in Article 8) may change and vary. To advertise on
a regular basis for franchise prospects in the Territory and to seek to obtain
sales prospects by networking and franchise sales promotional activities, to
promptly provide to Franchisor all pertinent information about responses to such
advertising or networking/promotions, and to thereafter assist Franchisor's
sales staff in processing and selling each respective franchise;
5.2 To abide by and strictly comply with the terms, rules and requirements
set forth in the Subfranchise UFOC, Manuals and this agreement;
5.3 To make no unauthorized promises, representations or commitments in
connection with the sale of franchises other than as furnished or authorized in
writing by Franchisor and to attend all regional and national meetings and the
annual Maui Tacos conventions when instituted;
5.4 In accordance with the support schedules established for Subfranchisor
by Franchisor with respect to policing and operational/marketing support, to
regularly inspect all franchise units within the Territory for quality
operations, appearance and cleanliness and, to use best efforts to assure that
franchisees in the Territory use only Franchisor approved and authorized foods,
supplies, equipment, furnishings and fixtures. Construction and equipment
specifications are set forth in the Construction Manual and authorized raw
materials are set forth in the Operations Manual as revised from time to time;
5.5 To provide each franchisee within the Territory with competent and
timely Support Services; which shall be defined as assistance in the nature of
consultation, advice and guidance regarding location selection, lease
negotiations, construction coordination, "Grand Openings", store training,
marketing advice and implementation, promotions, point of sale purchases or any
other administrative tasks designated by Franchisor as support programs that
need to be implemented for proper management of the Territory;
5.6 To provide reasonable assistance to Franchisor with regard to the
enforcement of franchise agreements within the Territory, as well as the rules
and obligations of the Manual and
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the general operating policies of Franchisor. [In clarification of this
paragraph, Subfranchisor is not required to commence or initiate legal
proceedings to enforce any of the above referenced agreements, manuals or
policies. Franchisor and Subfranchisor shall each reasonably cooperate with each
other, and provide testimony as needed for any arbitration or legal proceeding.
Franchisor's decision shall control with respect to decisions regarding when to
commence or settle a claim or as to strategy in defending arbitrations/legal
actions and choice of counsel.] To the extent possible, each franchise agreement
shall contain an arbitration clause requiring all disputes to be resolved by
arbitration. With respect to offensive or defensive franchisee
arbitrations/legal proceedings, including encroachment or franchisee territorial
disputes in the Territory against Franchisor or any leasing company, all costs
and expenses of all actions shall be borne equally by Franchisor and
Subfranchisor, since each jointly shares in the collections of the franchisee
fees. An offensive legal proceeding is an action or arbitration commenced to
enforce each respective Maui Tacos Restaurant franchise agreement or sublease.
Generally for traditional franchisees, continuing franchise fees are collected
by an eviction action which sometimes requires subsequent or simultaneous
arbitration actions. Prior to the commencement of any arbitration or legal
proceeding, Subfranchisor shall be afforded prior notice and an opportunity to
negotiate with the respective franchisee to amicably resolve the dispute. A
defensive legal proceeding is an action or arbitration commenced by a Maui Tacos
Restaurant franchisee, landlord or third party in the Territory against the
Franchisor;
5.7 To protect the integrity of the Trademarks and to maintain the highest
standards of integrity, quality and reputation;
5.8 To pay all bills, invoices, fees and other obligations that may be
owed to Franchisor by Subfranchisor;
5.9 To not engage in any unauthorized advertising, as such is defined in
the Manual or any other advertising that is not previously approved by
Franchisor, which approval shall not be unreasonably withheld or delayed;
5.10 To comply with Article 8 of this agreement entitled "Area Franchise
Development";
5.11 To promptly notify Franchisor if it is in violation of any of the
terms of this agreement and to grant to Franchisor a 45 day period in which to
cure any such defaults after notice thereof by registered mail in accordance
with Article 14 herein. Any claims of default not noticed to Franchisor within 6
months of default shall be deemed waived by Subfranchisor. Franchisor shall not
be deemed to be in default of this agreement unless and until such notice is
sent to Franchisor and such other parties set forth in Article 14 and the
aforesaid cure period has expired without said default having been cured;
5.12 To comply with any Maui Tacos Restaurant Franchise Agreement executed
by Subfranchisor or by any corporation controlled by Subfranchisor that has
purchased a Maui Tacos franchise;
5.13 To promptly attend to all sales leads and other inquiries from
prospective
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franchisees and to work cooperatively in the sales process with salesmen of
Franchisor;
5.14 If a dispute or disagreement arises with Franchisor, to submit such
dispute or disagreement to a single arbitrator in accordance with Article 20
herein;
5.15 To exercise its best efforts to protect the integrity of the
Trademarks and other proprietary rights, and to maintain the highest standards
of morality, ethics and reputation;
5.16 To feature the Trademarks and logotypes in all of its local
advertising, promotions, signs, literature and operations, and to clearly
indicate to all third parties that Subfranchisor is not an employee, agent or
fiduciary of Franchisor nor may Subfranchisor bind or obligate the Franchisor in
any manner whatsoever; and
5.17 On occasion, pre-sold individuals and other entities may indicate a
willingness to purchase Maui Tacos Restaurant franchise agreements without any
sales activities required. These generally arise from existing Maui Tacos
Restaurant franchisees or their employees in other territories or friends and
associates of Maui Tacos Restaurant franchisees, subfranchisors and employees of
Franchisor. With respect to the sales commissions owed for such sales, said
commissions may be payable to third parties involved in the sale and will be
recognized as finders fees.
5.18.1 Subfranchisor must, at Subfranchisor's expense, purchase and use a
personal computer system for its subfranchised business that is compatible with
Franchisor's computer equipment. Subfranchisor must obtain, use and maintain, at
Subfranchisor's expense, an Internet service connection that enables
Subfranchisor to receive e-mail, use internet services and send and receive
other electronic information to and from Franchisor.
5.18.2 Franchisor may add to, remove substitute or modify computer
requirements in its discretion. Franchisor will provide Subfranchisor with
standards and specifications for required computer products, instructions for
use, and updates of the same. Franchisor may require Subfranchisor to maintain
maintenance and/or service contracts at Subfranchisor's expense. Subfranchisor
may obtain approved computer products from any suppliers it chooses.
5.18.3 Franchisor may negotiate supply contracts for hardware and software
in its discretion. Franchisor will not guarantee, warranty, maintain or support
any computer hardware or software.
6. ADVERTISING:
6.1 Except as provided herein, and in Article 5, neither Franchisor nor
Subfranchisor is under any duty or obligation to engage in any consumer
advertising or promotion for Maui Tacos Restaurants in the Territory.
6.2 A sum equal to 4% of the gross weekly sales of each Maui Tacos
Restaurant franchisee (as provided in the standard Franchise Agreement), is to
be paid by each franchisee and deposited into an advertising account. Such funds
are to be only used for advertising uses as
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set forth in the respective franchise agreements subject to the sole control of
Franchisor.
6.3 Franchisor's policy with respect to advertising is to encourage the
franchisees in the Territory to form and implement an advertising cooperative
and to participate in advertising and marketing decisions in conjunction with
the assistance of Subfranchisor and the authorization, approval or direction of
Franchisor. Subfranchisor shall coordinate the formation of the cooperative,
attend all meetings and provide all assistance and guidance to the Maui Tacos
Restaurant franchisees as requested by Franchisor in order to work cooperatively
with said franchisees. If multiple territories are part of the cooperative, then
in such event Subfranchisor shall work harmoniously and constructively with
other subfranchisors and franchisees as may be needed.
6.4 Subfranchisor hereby agrees to provide the sum of $2,000, to be
matched by Franchisor and the franchisee's grand opening contribution, for each
of the first 3 franchises in the Territory (this will enable the Territory to be
opened correctly with appropriate promotional and marketing activities for these
initial franchises). Subfranchisor agrees to also spend approximately
$8,000-$12,000 each year to advertise for franchisees in its Territory, and to
join local civic clubs and similar organizations to promote the growth of its
subfranchise business.
7. FRANCHISE FEES:
7.1 The Initial Franchise Fee for a traditional Maui Tacos Restaurant
within the Territory shall be determined by Franchisor, in its sole discretion,
on a deal by deal basis, but generally on an annual basis. For the year
1999/2000, the Initial Franchise Fee for the first Traditional franchise sold to
a franchisee shall be $20,000. The Initial Franchise Fee for Nontraditional
franchisees (such as convenience store operators, institutional food service
companies, colleges, schools, supermarkets, hospitals, factories, and other
nontraditional entities) shall be determined by Franchisor, but will range from
$1 to $20,000. Said fee is dependent upon the number of non-traditional
transactions executed, the location of the nontraditional franchisee, the
marketing area, the opportunity or lack thereof and other subjective concerns.
Each traditional and nontraditional franchisee in the Territory shall be
obligated to pay a continuing franchise fee of 6% of gross sales on a weekly
basis, subject to limited exceptions designated by Franchisor in its sole
discretion. All initial franchise agreements shall be executed between
Franchisor and each respective franchisee. From the Initial Franchise Fees
payable for nontraditional franchises, it is possible that a significant portion
will be retained by Franchisor and used for the collective national marketing
program coordinated by the Maui Tacos Subfranchise Advisory Council ("MTSAC").
Subfranchisor acknowledges that the Initial Franchise Fees for non-traditional
franchisees will be subject to use as determined by MTSAC and Franchisor.
7.2 All traditional franchisees shall lease their Maui Tacos Restaurant
premises from (a) corporation(s) owned by Franchisor. Nontraditional franchisees
shall generally not be obligated to lease their unit premises from
corporation(s) owned by Franchisor, except as otherwise determined by
Franchisor. The sublease also shall require the franchisee to pay for each and
every week of operation a sum equal to 6% of the gross sales of the franchise
unit; plus 4% of gross sales, to be deposited into an advertising account as
provided in Article 6 herein.
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The aforesaid 6% and 4% of gross sales are the same 6% and 4% of gross sales
payable under the franchise agreement. The sublease duplicates the obligations
of the franchise agreement for enforcement and collection purposes, however,
payment under each respective Maui Tacos Restaurant sublease satisfies the
payment obligation under the respective Maui Tacos Restaurant franchise
agreement. Subfranchisor, upon the written request of Franchisor, may as a
representative (not agent) of Franchisor and in compliance with each respective
franchise agreement in the Territory, audit any franchisee's books and records
or inspect each franchisee's Maui Tacos Restaurant premises for determination of
compliance with the respective franchisee's obligations under its Maui Tacos
Restaurant franchise agreement.
7.3 All revenues, as set forth in Articles 6 and 7, generated by the sale
and operation of franchised units within the Territory (except advertising
funds) shall be paid or caused to be paid to Franchisor. Provided that
Subfranchisor is in full compliance with its obligations hereunder,
Subfranchisor shall receive one-half of all sums received by Franchisor from
Maui Tacos Restaurant franchisees within the Territory (including but not
limited to all Initial Franchise Fees and all continuing weekly franchise fees,
which are currently 6% of gross sales). Franchisor and Subfranchisor agree that
Franchisor shall not be deemed to have received any portion of the Initial
Franchise Fee paid pursuant to the decisions of MTSAC in connection with the
sales of nontraditional franchises. In the event of a conflict between this
paragraph and any other provision of this agreement, this paragraph shall
control.
7.4 Franchisor upon receipt of good funds, or clearance of any deposit,
shall then remit every 30 days as follows: (i) half to Subfranchisor and (ii)
half to Franchisor. Franchisor is hereby granted a security interest and lien
against any and all fees, or accounts payable by Franchisor to Subfranchisor to
secure full compliance by Subfranchisor of its obligations as provided herein.
7.5 At the request of Subfranchisor, along with the monthly payment due
the Subfranchisor herein from the collected franchise fees of each respective
franchisee in the Territory, the Franchisor shall provide a monthly report
describing the gross revenues received from each franchisee, the fees received
from each franchisee and the monies payable to Subfranchisor.
7.6 With respect to obligations owed by Subfranchisor to Franchisor,
Franchisor is further granted the right of set-off against any fees or accounts
payable to Subfranchisor from any and all fees or other monies collected by
Franchisor for which a portion is to be paid to Subfranchisor.
7.7 It is acknowledged that from each Initial Franchisee Fee, the
following fees will be deducted prior to the 50/50 division of net funds between
Franchisor and Subfranchisor; (i) a sales commission up to $5,000 paid to the
Franchisor for its sales department, (ii) a design fee of $500-$l,000 paid to an
architect or designer, (iii) a training fee of $1,500 paid to the Maui Tacos
training school for said franchise, (iv) a sales screener fee of $1,000 paid to
Franchisor, and (v) a fee of $500 payable to Franchisor for the establishment of
the Maui Tacos leasing entity. Subfranchisor or its salesmen will not receive a
sales commission.
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7.7.1 By way of example, from the sale of a $20,000 traditional franchise
in the Territory: (i) a $5,000 sales commission will be paid to Franchisor, (ii)
a $1,500 training fee shall be retained by Franchisor for training, (iii) a $500
design and layout fee shall be retained by Franchisor for the design and layout
of the Maui Tacos Restaurant, (iv) a $1,000 fee for sales screeners shall be
retained by Franchisor, and (v) a $500 fee for the formation of the Maui Tacos
leasing corporation, minute book, first tax returns and any other leasing
corporation expenses that arise during the first two years of operation. The
remaining balance of the Initial Franchise Fee is divided equally between
Franchisor and Subfranchisor. Accordingly, it is anticipated that Subfranchisor
will receive the approximate sum of $5,750.
7.7.2 By way of example, from the sale of a $20,000 nontraditional
franchise in the Territory: (i) a $5,000 sales commission will be paid to
Franchisor, (ii) a $1,500 training fee shall be retained by Franchisor for
training, (iii) a $500 design and layout fee shall be retained by Franchisor for
the design and layout of the Maui Tacos Restaurant, and (iv) a $1,000 fee for
sales screeners shall be retained by Franchisor. The remaining balance is
retained by the Franchisor for nontraditional collective marketing sales efforts
sponsored by MTSAC.
7.8 Subfranchisor acknowledges that if Franchisor creates a national
leasing coordinator position to help secure Maui Tacos Restaurant leasing
locations from national or regional landlords, Subfranchisor shall contribute
$200 from its share of funds received from the sale of each Traditional
franchise agreement to be matched, in each instance, by Franchisor.
Subfranchisor agrees to participate in this program.
7.9 Each Maui Tacos franchise agreement provides that upon the sale of a
Maui Tacos restaurant, or a controlling interest in a corporation that owns a
Maui Tacos restaurant, 5% of the gross sales price shall be paid to Franchisor
as a transfer fee. Franchisor will pay half of the 5% transfer fee to
Subfranchisor, provided Subfranchisor performs all operational and marketing
support required, in Franchisor's sole discretion, by the replacement
franchisee.
8. AREA FRANCHISE DEVELOPMENT:
For the purpose of this Article, the following definitions shall control:
8.1 "One year" shall be defined as 365 days from the date of execution of
this agreement and each anniversary date thereafter.
8.2 "Open traditional Maui Tacos Restaurant" shall be defined as an open
operating Maui Tacos Restaurant in an approved location wherein a master lease
has been executed by a subsidiary of Franchisor, except where the leasing
requirement is waived by Franchisor, with a Maui Tacos Restaurant franchise
agreement executed for said location.
8.3 "A nontraditional franchisee" shall be defined as described in
Franchisor's Subfranchise UFOC, and which opens within 6 months thereafter and
remains open for 24 months or longer.
8.4 During the Term and any renewal terms of this agreement, Subfranchisor
shall
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reasonably operate and continue to operate a franchise sales program in the
Territory so that new franchisees for both new and existing Maui Tacos
Restaurant locations (resales) may be obtained. In order to effectuate the
foregoing, Subfranchisor agrees to actively locally advertise for franchisees,
network with applicable organizations located in the Territory, provide all
sales leads to Franchisor, work with Franchisor's staff to respond to sales
leads, process such leads in a prompt and efficient manner, and generally
function together with Franchisor's sales department as a franchise sales
organization. Subfranchisor must also attend trade shows and implement any new
systems and techniques developed by Franchisor, or suggested by Franchisor,
designed to attract new franchisees to the Maui Tacos system.
8.5 Subfranchisor has agreed to a minimum market development obligation in
order to ensure Franchisor that the Territory will be developed appropriately.
Franchisor will award all franchise agreements, but Subfranchisor will be
involved in the sale and/or development of the real estate wherein some or all
Maui Tacos Restaurants are located. Accordingly, as a material condition of this
agreement, the following minimum number of Maui Tacos Restaurants (which include
traditional or nontraditional Maui Tacos Restaurants, excluding distribution
points) shall be opened in the Territory, directly or indirectly, on a
cumulative basis (i.e., excess stores opened in one year count toward succeeding
years' requirements) as follows:
1st year Maui Tacos Restaurants
---
2nd year Maui Tacos Restaurants
---
3rd year Maui Tacos Restaurants
---
4th year Maui Tacos Restaurants
---
5th year Maui Tacos Restaurants
---
6th year Maui Tacos Restaurants
---
7th year Maui Tacos Restaurants
---
8th year Maui Tacos Restaurants
---
9th year Maui Tacos Restaurants
---
10th year Maui Tacos Restaurants
---
8.6 For years eleven through fifty after the date hereof, Subfranchisor
shall reasonably and affirmatively continue its best efforts to develop Maui
Tacos Restaurants in the Territory. Franchisor and Subfranchisor shall establish
reasonable 5-year developmental obligations, considering relevant factors,
including market growth, nontraditional and new concept venues including
colleges, schools, sports stadiums and the like, for each year commencing on the
10th year after the date hereof and each 5-year anniversary thereafter with
appropriate credit granted to Subfranchisor for all open Maui Tacos Restaurants
in excess of the minimum developmental obligations set forth above. If the
parties cannot agree, the issue shall be submitted to the American Arbitration
Association whose decision shall be final. The locale of all arbitrations with
the American Arbitration Association shall be in New York, New York before a
single arbitrator.
8.7 Subfranchisor further agrees that other forms of Maui Tacos
distribution points may be developed. Accordingly in the event that Franchisor
develops Maui Tacos distribution points, Subfranchisor agrees to exercise its
best efforts to help develop and implement such distribution points in the
Territory.
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8.8 Notwithstanding anything to the contrary contained herein, in the
event Subfranchisor fails to comply with its development schedule as described
in Articles 8.4 and 8.5 herein, Subfranchisor shall lose its exclusive rights
granted herein; provided, however, this agreement shall remain in full force and
effect as to those Maui Tacos Restaurants already sold as of the date of the
default including, without limitation, the rights to receive franchise fees in
accordance with Article 7.
8.9 If Subfranchisor fails to meet its development schedule, Franchisor
may develop the Territory itself, or through others by the sale of another
subfranchise, or otherwise, except that it will not construct nor permit others
to construct another Maui Tacos Restaurant within a reasonable area of any
existing Maui Tacos Restaurant located within the Territory. The term
"reasonable area" shall be defined as to each Maui Tacos Restaurant, on a case
by case basis, between Franchisor and Subfranchisor.
8.10 If the "reasonable area" cannot or has not been agreed upon, the
issue shall be submitted to arbitration, before a single arbitrator, in
accordance with the rules of the American Arbitration Association, in New York,
New York, whose decision shall be final.
8.11 Franchisor agrees to reasonably extend the development schedule of
Subfranchisor if delays are caused as a result of force majeure events or other
delays which are not the fault of Subfranchisor, such as disputes with
contractors, delays in obtaining permits, plans or variances or any other
reasonable delay, provided that a store premises is leased and a reasonable
attempt is being made to open the required number of Maui Tacos Restaurants.
Nothing contained in this paragraph shall be deemed to modify Subfranchisor's
obligations under Article 8 herein. In no event, however, shall said time be
extended for more than 120 days unless such delays are caused by Franchisor.
9. INSPECTION:
Franchisor and Subfranchisor, upon 15 days prior written notice, shall
each have the right to examine the books, records and supporting data of the
other with respect to the obligations, records and financial data, including
collections and disbursements, of the Territory at the principal place of
business of the other for audit purposes. Subfranchisor agrees to submit to
Franchisor annual uncertified profit and loss and balance sheet statements
prepared in accordance with generally accepted accounting principals. Any audit
or examination shall occur during normal business hours. During such audit, both
Franchisor and Subfranchisor shall use their best efforts to minimize any
interference with the other's business operations.
10. TAXES, LAWS AND LEASING CORPORATIONS:
10.1 Subfranchisor shall pay any and all Federal, City, State or local
taxes, fees, fines or assessments arising out of the operation of
Subfranchisor's business, including a 50% share of any tax payable on receipts
from any franchisee, such as a gross receipts tax which will be paid from
receipts from franchisees. Subfranchisor agrees to comply with all federal,
state and local laws, orders, codes and ordinances applicable to Subfranchisor's
business.
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10.2 Franchisor and Subfranchisor acknowledge that, subject to compliance
with this agreement by Subfranchisor, including the provisions regarding Support
Services during the Term and any renewal terms, Subfranchisor is the equitable
owner of the franchise fees generated from the franchisees in the Territory
which fees are collected by Franchisor and 50% of which are then remitted to
Subfranchisor. In connection with Subfranchisor's share of any receipts
collected by Franchisor from franchisees in the Territory, Subfranchisor is
obligated to pay any applicable excise or gross receipts tax or other charges
payable under any applicable law as Franchisor is similarly obligated to pay any
applicable excise or gross receipt tax or other charge payable under applicable
law for its share of franchise fees collected from the Territory.
10.3 Subfranchisor and Franchisor agree to equally share any expense, fee
or charge payable in order to maintain each leasing corporation in the Territory
in good standing.
11. PILOT MAUI TACOS RESTAURANTS:
NONE.
12. LOCAL CODES AND ORDINANCES:
Subfranchisor agrees to comply with all local laws, orders, codes and
ordinances applicable to Subfranchisor's business.
13. TERMINATION:
This agreement shall terminate in the event of the occurrence of any of the
following:
13.1 With respect to the termination rights of Franchisor:
13.1.1 At the election of Franchisor, in the event Subfranchisor fails to
meet any of its obligations contained in this agreement, including but not
limited to, the obligation to develop Maui Tacos Restaurants as specified in
Article 8, and where such default continues for the applicable period of time as
set forth in Article 15 herein, without being cured after the mailing of written
notice of such default, by certified mail (return receipt requested) by
Franchisor.
13.1.2 Upon the bankruptcy or the appointment of a receiver for the assets
of Subfranchisor, however, so long as Subfranchisor is otherwise in full
compliance with this agreement Franchisor agrees that it will not exercise its
termination rights under this sub-paragraph.
13.1.3 In the event this agreement is terminated pursuant to a default of
Subfranchisor's minimum unit development obligation pursuant to Article 8
herein, Subfranchisor shall retain all of its rights to receive its share of
continuing franchise fees from franchises opened prior to termination, subject
to strict compliance with all of the obligations (Support Services, etc.) of
Subfranchisor contained in Franchisor's Subfranchise UFOC, this agreement and
any amendments hereto. The terms of this paragraph shall survive the termination
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of this agreement.
13.2 With respect to the termination rights of Subfranchisor:
13.2.1 At the election of Subfranchisor in the event Franchisor fails to
meet any of its obligations as specified herein and where such default continues
for 45 days without being cured after the mailing of written notice of such
default by certified mail (return receipt requested).
13.3 With respect to a default by either Franchisor or Subfranchisor, each
party shall be entitled to any and all lawful damages or rights and remedies
available at law or at equity but in no event shall Subfranchisor or Franchisor
be entitled to receive lost profits, or punitive or exemplary damages. The
successful party to such arbitration shall be entitled to receive reasonable
attorneys' fees not to exceed $30,000.
14. NOTICES:
14.1 No notice sent under any provision of this agreement shall be of any
effect unless it is sent by certified mail (return receipt requested), addressed
to the party for which it is intended at the following address:
With respect to Franchisor:
At the address first above written and to
David L. Siegel, Esq., 740 Broadway
New York, New York 10003
With respect to Subfranchisor:
At the address first above written.
14.2 Notice so served shall be deemed received 5 business days after
mailing. Either party may change its address for service of notice at any time
by notice similarly served.
15. DEFAULT:
15.1 Franchisor shall not be in default of this agreement unless and until
Franchisor has received notice of such default by certified mail, (RRR) and a
reasonable period in which to cure said default. The minimum period of such cure
period shall not be less than 45 days after receipt of notice. In the event that
Franchisor is reasonably attempting to cure such default in a diligent and
expeditious manner and does in fact cure such default, Subfranchisor agrees that
it will reasonably extend the cure period.
15.2 Subfranchisor shall not be in default of this agreement unless and
until Subfranchisor has received written notice of default by certified mail
(RRR) and a reasonable period in which to cure said default. The minimum period
of such cure period shall not be less than 45 days after receipt of notice,
except for: (i) defaults with respect to the supplying of services to each Maui
Tacos Restaurant franchisee in the Territory which shall be 15 days after
receipt of written notice, (ii) monetary defaults of obligations of
Subfranchisor to Franchisor, if
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any, or defaults of the development schedule obligations as set forth in Article
8, which shall be 10 days after receipt of written notice, and (iii) defaults of
any applicable state or federal franchise or securities law, which shall be 15
days after receipt of written notice or as said law requires. In the event that
Subfranchisor is reasonably attempting to cure such default in a diligent and
expeditious manner and does in fact cure such default, Franchisor agrees that it
will reasonably extend any cure period to enable Subfranchisor to cure any
default except for those set forth in (i) or (ii) herein.
16. MISCELLANEOUS:
16.1 This agreement has been executed in conformity with and shall be
governed by the laws of the State of New York or if required under the laws of
the state of the Territory, said laws shall control.
16.2 This agreement shall inure to and be binding upon the heirs,
executors, administrators, successors, and assigns of the respective parties
hereto and represents the entire agreement of the parties. Until this agreement
is executed by all parties, all offers, acceptances, written proposals, letters
of intent or other written or oral understandings shall be non-binding on the
parties and deemed preliminary negotiations.
16.3 This agreement shall inure to the benefit of the successors and
assigns of Franchisor. Franchisor shall have the right to transfer or assign
this agreement to any person or legal entity who assumes its terms and agrees to
comply with Franchisor's obligations contained herein. Franchisor shall have no
liability for the performance of any obligations contained in this agreement
after the effective date of such transfer or assignment.
16.4 This agreement cannot be changed, modified or terminated orally. This
is the entire agreement of the parties.
17. CONSENT TO TRANSFER:
17.1 For all proposed transfers or assignments of this agreement, and
transfers of more than 51% of the outstanding and issued stock of Subfranchisor
by one or more transfers or any transfer which, directly or indirectly,
effectively changes ownership or management control of Subfranchisor, Franchisor
will not unreasonably withhold its consent to any transfer or assignment which
is subject to the restrictions of this Article, provided however, Franchisor
shall not be required to give its consent unless all of the following conditions
are met prior to the effective date of assignment:
17.1.1 Upon the execution of this agreement and upon each direct or
indirect transfer of an interest in this agreement, or in Subfranchisor, and at
any other time upon Franchisor's request, Subfranchisor shall, within 5 days
prior to such transfer, or at any other time at Franchisor's request, furnish
Franchisor with an estoppel agreement indicating any and all causes of action,
if any, that Subfranchisor may have against Franchisor, or that none exist, and
a list of all shareholders or partners having an interest in this agreement or
in Subfranchisor, the percentage interest of each shareholder or partner, and a
list of all officers and directors, in such form as Franchisor may
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<PAGE>
require;
17.1.2 Subfranchisor's written request for transfer of either a partial or
whole interest in this agreement must be accompanied by an offer to Franchisor
of a right of first refusal at the same price offered by any bona fide buyer
less 5%. Franchisor shall have the right and option, exercisable within 15 days
after receipt of written notification from the Subfranchisor, to send written
notice to Subfranchisor that Franchisor or its third-party designee, intends to
purchase the interest which is proposed to be transferred, on the same terms and
conditions offered by the third party less 5%. If Franchisor accepts such offer,
the 5% transfer/administrative fee due by Subfranchisor in accordance with
Article 17.1.8 shall be waived by Franchisor. Any material change in the terms
of an offer prior to closing shall cause it to be deemed a new offer, subject to
the same right of first refusal by Franchisor, or its third-party designee, as
in the case of the initial offer. Franchisor's failure to exercise such option
shall not constitute a waiver of any other provision of this agreement,
including any other requirements of this Article with respect to the proposed
transfer;
17.1.3 Subfranchisor is not in default under the terms of this agreement,
the Manuals or any other obligations owed Franchisor, and all of Subfranchisor's
then-due monetary obligations to Franchisor have been paid in full;
17.1.4 Subfranchisor and its shareholders or members, if Subfranchisor is
a corporation or limited liability company, have executed a general release, in
a form prescribed by Franchisor, of any and all claims against Franchisor, its
affiliates, subsidiaries, shareholders, directors, officers, subfranchisors and
employees;
17.1.5 The transferee/assignee has demonstrated to Franchisor's
satisfaction that it meets all of Franchisor's then-current requirements for new
subfranchisors, including, without limitation, possession of good moral
character and reputation, satisfactory credit ratings, acceptable business
qualifications, and the ability to fully comply with the terms of this
agreement;
17.1.6 The transferee/assignee, its general manager and operational
employees responsible for the operation of the subfranchise business have
satisfactorily completed Franchisor's training program;
17.1.7 The transferee/assignee executes such other documents as Franchisor
may require, including a replacement subfranchise agreement on the then-standard
subfranchise agreement form used by Franchisor as modified by the business terms
set forth in this agreement, in order to assume all of the obligations of this
agreement, to the same extent, and with the same effect, as previously assumed
by the assignor; and
17.1.8 At the completion of Subfranchisor's sale transaction,
Subfranchisor shall pay to Franchisor an administrative/transfer fee of 5% of
the gross sales price of Subfranchisor's business, subfranchise agreement and
other assets.
17.2 Subfranchisor's rights may pass to Subfranchisor's next of kin or
legatee if they assume Subfranchisor's obligations and attend and complete
Franchisor's training program. Upon Subfranchisor's disability, Subfranchisor
may sell the subfranchise or keep it, if operated by trained
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personnel.
17.3 Franchisor's consent to a transfer shall not constitute a waiver of
any claims it may have against the transferring party arising out of this
agreement or otherwise.
17.4 If Subfranchisor is an individual, Franchisor hereby consents to the
assignment of this agreement and any and all obligations referable thereto
without any fee charged by Franchisor to a corporation principally owned by
Subfranchisor within 90 days from the date hereof. Upon such assignment and
assumption by the corporation along with delivery of executed originals of same
to Franchisor within 90 days from the date hereof, the individual Subfranchisor
shall be released from any and all personal liability.
18. DISCLOSURE:
18.1 Subfranchisor acknowledges receipt on Insert Date (the "Disclosure
Date") of Franchisor's of the (i) Maui Tacos International, Inc. 1999 (Effective
Date, ) Maui Tacos Restaurant Subfranchise Disclosure Document that incorporates
Items 1 through 22, Maui Tacos Subfranchise agreement (which Operator
acknowledges is in all material respects identical to this Agreement), including
lists of subfranchisors (a) currently operating as of June 30, 1999 and (b) who
have left the system as of June 30, 1999; (ii) Franchisor's 1999 (Effective Date
) Maui Tacos Restaurant Franchise Disclosure Document that incorporates Items
1-23, Maui Tacos restaurant franchise agreement, rider, nontraditional rider,
sublease, sample promissory note, confidential information agreement, June 30,
1999 audited financial statements of Franchisor, list of franchisees as of June
30, 1999, list of franchisees who left the system within the past 12 months,
list of affiliates of Franchisor, list of approved manufacturers, list of
equipment for sale by BI Concept Systems, Inc., and the salesman disclosure
forms of _________________ (the "Salespersons") and all other salespersons or
entities involved in the sale or execution of this Agreement, on the Disclosure
Date, which date is at least 15 business days (excluding holidays and weekends)
prior to the date of execution of this Agreement. Franchise Development Managers
are individuals who are involved as franchise sales persons on behalf of the
Franchisor. They are not the agents of the Franchisor nor are they authorized to
enter into any contracts, agreements, understandings, or modifications of any
agreement between the Subfranchisor herein or any other franchisee and the
Franchisor or on behalf of any subsidiary, affiliate or other entity associated
with the Franchisor. With respect to the franchise sales process, Franchise
Development Managers are only authorized to disseminate information approved in
writing by the Franchisor. Franchise Development Managers are not authorized nor
is there any intention to grant any apparent or actual authority to do anything
other than sell franchises for the Franchisor in accordance with applicable
laws, rules and regulations.
18.2 By execution hereof, Subfranchisor acknowledges that Franchisor is
relying upon the representations contained in this agreement, which include,
inter alia, that there have been no representations, forecasts, warranties or
statements made by Franchisor or any of its salesmen, officers, directors,
employees or others including, but not limited to, franchise or subfranchise
sales, profits and/or growth potential.
17
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19. NO REPRESENTATIONS, ETC.:
Subfranchisor warrants, represents and acknowledges that:
19.1 Except for any representation or warranty contained in Franchisor's
Subfranchise UFOC, if any, there have been no representations, forecasts,
inducements, projections, warranties or statements made by Franchisor or any of
its salesmen, officers, directors, employees, or others, including but not
limited to franchise or subfranchise sales, profits and/or growth potential nor
has Subfranchisor relied upon any representations, forecasts, inducements,
projections, warranties or statements made by any entity involved in this
transaction;
19.2 Subfranchisor has made an independent decision to enter into this
transaction and to consultation and advice of counsel and that it has not been
induced by any promise or commitment not contained herein. This is the entire
agreement of the parties hereto;
19.3 No other salesman, staff member, entity, or associate of Franchisor
has met Subfranchisor regarding this subfranchise sale or the offer and
acceptance thereof except the salesmen set forth herein;
19.4 Subfranchisor acknowledges and agrees that it and its salesmen
(called Franchise Development Managers) now existing or hereinafter existing are
not the agents of Franchisor nor may they bind Franchisor unless agreed to in
writing by Franchisor;
19.5 There have been no representations, warranties, inducements, pro
formas, forecasts, estimates or any other inducement or statement made by any
salesperson associated with Franchisor including the salesmen set forth herein
or Franchisor or its agents, salesmen, directors, officers, employees or any
other salesmen or other person or entity regarding financing, net profits, gross
profits, net sales, gross sales, costs or expenses of Maui Tacos restaurants
generally or of any specific Maui Tacos Restaurant nor has the Subfranchisor
relied upon any representations, warranties, inducements, pro formas, forecasts,
estimates or any other inducement or statement made by Franchisor or its agents,
directors, officers, employees or salesmen or other associates or any
subfranchisor or any of any subfranchisors agents, directors, officers,
employees or salesmen or other associates, regarding financing, net profits,
gross profits, net sales, gross sales, costs or expenses of Maui Tacos
Restaurants generally or of any specific Maui Tacos restaurant or with respect
to any other material fact relating to the development of Maui Tacos Restaurants
in Territory or any other matter pertaining to Franchisor, any subfranchisor,
the Maui Tacos chain or any other matter not set forth herein; and
19.6 Articles have been published about Maui Tacos, specifically one entitled
Beach Blanket Burrito which appeared in the December 1998 issue of The Chain
Leader and the other entitled Hawaiian Style Mexican Hits the Mainland with Maui
Tacos which appeared in the November 23, 1998 issue of Nation's Restaurant News
(the "Articles").
By execution of this Agreement you acknowledge that either (i) you received the
Articles with sections deleted so that the Articles made no references to sales,
store volumes or other representative numbers or (ii) you did not receive the
Articles from Franchisor or (iii) if you
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independently reviewed the Articles that any information in the Articles is not
relied on in any way or manner and you understand that it may be either
incorrect and/or misleading.
By execution of this agreement you hereby acknowledge that the contents of the
Articles will not, cannot and should not be relied on nor used as an inducement
to you or any corporation that you are associated with which is involved in the
purchase of a Maui Tacos subfranchise or franchise agreement.
19.7 You further acknowledge that Maui Tacos International, Inc. has not made
any representations to you as to the accuracy of the contents of the Articles
and has specifically disavowed the information contained in the Articles.
You agree that your decision enter into this Agreement is in no way be based
upon the Articles and its contents but is be based only upon information
provided to you in the current subfranchise and franchise disclosure documents
for Maui Tacos and your own investigations.
By execution hereof you confirm that at no time did Norm Willden, Bob Sitkoff or
any other individual or representative of Maui Tacos make any kind of numerical
representation, estimate, projection, forecast or percentage of any kind or
nature for any reason including profits, expenses, store volumes or sales
regarding Maui Tacos restaurants or the Maui Tacos subfranchise business nor
have you received any information regarding sales, profitability, costs, or
expenses regarding the Maui Tacos Restaurant operating at 1100 Hammond Drive,
Ste. 460, Atlanta, Georgia 30328.
19.8 There have been no representations, warranties, inducements, pro formas,
forecasts, estimates or any other inducement or statement made by any
salesperson associated with Franchisor including the salesmen set forth herein
or Franchisor or its agents, salesmen, directors, officers, employees or any
other salesmen or other person or entity regarding subfranchise financing,
subfranchise net profits, subfranchise gross profits, subfranchise net sales,
subfranchise gross sales, subfranchise costs or expenses nor has the
Subfranchisor relied upon any representations, warranties, inducements, pro
formas, forecasts, estimates or any other inducement or statement made by
Franchisor or its agents, directors, officers, employees or salesmen or other
associates or any subfranchisor or any of any subfranchisors agents, directors,
officers, employees or salesmen or other associates, regarding subfranchise
financing, subfranchise net profits, subfranchise gross profits, subfranchise
net sales, subfranchise gross sales, subfranchise costs or subfranchise expenses
generally or specifically or with respect to any other material fact relating to
the development of Maui Tacos Restaurants in the Territory or any other matter
pertaining to Franchisor, any subfranchisor, the Maui Tacos chain or any other
matter not set forth herein. Franchise Development Managers are individuals who
are involved as franchise sales persons on behalf of the Franchisor. They are
not the agents of the Franchisor nor are they authorized to enter into any
contracts, agreements, understandings, or modifications of any agreement between
the Operator herein or any other franchisee and the Franchisor or on behalf of
any subsidiary, affiliate or other entity associated with the Franchisor. With
respect to the franchise sales process, Franchise Development Managers are only
authorized to disseminate information approved in writing by the Franchisor.
Franchise Development Managers are not authorized nor is there any intention to
grant any
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apparent or actual authority to do anything other than sell franchises for the
Franchisor in accordance with applicable laws, rules and regulations.
FRANCHISOR WILL BE RELYING UPON YOUR RESPONSES TO THE FOLLOWING QUESTIONAIRE AND
IF ANY RESPONSE IS A NEGATIVE FRANCHISOR WILL EITHER WORK WITH YOU TO CURE OR
RESOLVE THE PROBLEM OR REFUSE TO EXECUTE THIS AGREEMENT.
PLEASE CIRCLE THE APPROPRIATE RESPONSE TO EACH STATEMENT AND INITIAL WHERE
INDICATED. IF YOUR ANSWER TO ANY QUESTION IS "NO", PLEASE EXPLAIN YOUR ANSWER IN
THE LINED SPACES PROVIDED AT THE END OF THIS AGREEMENT.
*************************
1. Subfranchisor has been represented by independent counsel who has reviewed
the Subfranchise UFOC, this Maui Tacos subfranchise agreement and the Maui Tacos
franchise agreement. If Subfranchisor elects not to use an attorney, it
acknowledges that it will be bound by the disclosures set forth in the
Subfranchise UFOC, and the terms and provisions of this agreement will be
interpreted in accordance with applicable law and not subject to your personal
view of what they may mean and that any oral agreements or inducements unless
included in this Agreement , if any, will not be binding upon Franchisor.
YES NO __________
(Initial)
2. Subfranchisor is fully informed as to all of Subfranchisor's obligations, and
of Franchisor's obligations as set forth in this agreement and the Subfranchise
UFOC.
YES NO __________
(Initial)
3. Subfranchisor has only had contact, negotiations and/or discussions with the
salesperson(s) and executives identified in this agreement and no other
regarding this subfranchise sale or the offer and acceptance of this agreement.
YES NO __________
Initial)
4. Except for the salesperson(s) and executives identified in this agreement, no
other salesman, staff member, entity or associate of Franchisor met the
Subfranchisor regarding this subfranchise sale or the offer and acceptance of
this agreement.
YES NO __________
(Initial)
5. Subfranchisor acknowledges that Franchisor, its salesperson(s) any of their
agents, salesmen, directors, officers or employees or any other salesperson(s),
person or entity have not made, nor has Subfranchisor relied on any
representations, warranties, inducements, pro formas, forecasts, estimates or
any other inducements or statements regarding subfranchise financing,
subfranchise net profits, subfranchise gross profits, subfranchise net sales,
subfranchise gross sales, subfranchise costs or subfranchise expenses, generally
or specifically or with respect to
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any other material fact relating to the development of Maui Tacos Restaurants in
the Territory or any other matter pertaining to Franchisor, any subfranchisor,
the Maui Tacos chain or any other matter not set forth herein.
YES NO __________
(Initial)
6. Subfranchisor acknowledges that Franchisor's salesperson(s) set forth herein
are not the agent(s) of Franchisor nor has said salesperson or any other entity
made any other agreement or understanding with Subfranchisor or any of its
stockholders or members except as is set forth in this agreement.
YES NO __________
(Initial)
7. Subfranchisor understands that in entering into this agreement, Franchisor is
relying upon Subfranchisor's acknowledgments, representations and commitments as
stated in this Section.
YES NO __________
(Initial)
8. In the course of its diligent examination of the Franchisor's offering,
Subfranchisor or its executives have met with ____________ and _____________;
however, at these meetings only generalities were discussed about Maui Tacos
with no specific information provided.
YES NO __________
(Initial)
"NO" ANSWERS EXPLAINED HERE:
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IF YOU NEED MORE ROOM, PLEASE ATTACH EXTRA SHEETS OF PAPER
20. ARBITRATION:
20.1 Franchisor and Subfranchisor acknowledge that disputes or
disagreements may arise during the term of this agreement and any renewals
thereto. Franchisor and Subfranchisor have elected to resolve such disputes or
disagreements in a non-judicial alternative dispute resolution format ("ADR").
An ADR format minimizes the expense of dispute resolution and generally can be
accomplished in a more expeditious and effective manner. By agreeing to an ADR
format, both Subfranchisor and Franchisor are also waiving a number of rights,
remedies and privileges which may arise in a judicial resolution format. In
view, however, of the continuing relationship between Subfranchisor and
Franchisor under the original and renewal terms of this agreement, both
Subfranchisor and Franchisor agree that an ADR format is the most economical,
efficient and practical way to resolve disputes and disagreements.
20.2 Accordingly, except as otherwise provided in this agreement, in the
event of any dispute or disagreement between Franchisor and Subfranchisor with
respect to any issue arising out
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of or relating to this agreement, its breach, its interpretation or any other
disagreement between Subfranchisor and Franchisor, such dispute or disagreement
shall be resolved by arbitration. In the event of any dispute or disagreement,
Subfranchisor and Franchisor both agree to submit the dispute to arbitration in
accordance with the least expensive procedure of the American Arbitration
Association ("AAA"), and the application for such arbitration shall be filed in
the AAA's New York, New York office . Franchisor and Subfranchisor agree that
the hearing(s) shall be held in New York, New York, before one arbitrator. This
paragraph shall not apply to any monetary defaults of Subfranchisor or defaults
of Article 8 herein which shall not require arbitration for termination.
However, Franchisor shall be entitled to commence arbitration(s), seek
declaratory judgments or decisions about its status with Subfranchisor or its
compliance with this agreement or to establish the existence of a of default by
Subfranchisor or for any other relief that may be appropriate.
20.3 Franchisor and Subfranchisor agree that this agreement evidences a
transaction involving interstate commerce and that the enforcement of this
arbitration provision and the confirmation of any award issued to either party
by reason of an arbitration conducted pursuant to this arbitration provision is
governed by the Federal Arbitration Act, 9 U.S.C. ss. 1 et seq.
20.4 Lost profits, punitive or exemplary damages or attorneys' fees
exceeding $30,000 may not be awarded by the arbitrator, and any such award shall
not be enforceable or enforced in any court. If the waiver of lost profits, or
punitive or exemplary damages or attorneys' fee limitation, is in whole or in
part in violation of the laws of the state where the Subfranchisor's Territory
is located, that law shall control, and any such award shall be enforceable or
enforced in any court of appropriate jurisdiction. In no event can any of the
provisions of this agreement, including but not limited to Article 8 as
specified in this agreement, or in amendments to this agreement or in the
Manuals, be modified or changed by the arbitrator.
20.5 With respect to any legal proceeding authorized by this agreement,
Subfranchisor and Franchisor each agree that they will commence such legal
proceeding only in the Federal District Court for the Southern District of New
York, and both Franchisor and Subfranchisor consent to the jurisdiction in the
Federal District Court for the Southern District of New York. In the event the
parties do not meet the jurisdictional requirements for Federal District Court,
the parties consent to jurisdiction in the Supreme Court, New York County, State
of New York. Subfranchisor agrees that mailing to its last known address by
certified mail of any process shall constitute lawful and valid process. In all
cases, Subfranchisor and Franchisor each waives any right to a trial by jury.
Notwithstanding the foregoing, if the laws of the state where Subfranchisor's
Territory is located requires jurisdiction of the courts of that state or
control by the laws of that state, then this agreement shall be deemed modified
to comply with such requirement.
20.6 The terms of this article shall survive termination, expiration or
cancellation of this agreement.
21. RESTAURANT TRANSFER FEE:
Each Maui Tacos Restaurant franchise agreement provides that upon the sale
of a Maui Tacos Restaurant or controlling interest in a corporation that owns a
Maui Tacos Restaurant, 5%
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of the gross sales price shall be paid to Franchisor as a transfer fee. In
connection therewith, provided Subfranchisor is not in default of this
agreement, Franchisor agrees to share equally the 5% fee with Subfranchisor,
provided Subfranchisor provides any and all necessary operational assistance and
Maui Tacos Restaurant supplementary training for the transferee franchisee at
its own expense. Notwithstanding the foregoing, if the Maui Tacos Restaurant
franchisee is owned by Subfranchisor or the stockholders of Subfranchisor, no
transfer fee shall be charged for transfers of the outstanding and issued shares
of the corporate Subfranchisor to another corporation owned by the Subfranchisor
or between existing stockholders of the Subfranchisor and their immediate
families (mother, children, wife, husband, father, brother or sister) or by
bequest, devise, operation of law or otherwise in the event of the death of any
of the stockholders of the Subfranchisor.
22. COOPERATIVE:
Subfranchisor hereby agrees that it will join Franchisor's
subfranchisor advertising cooperative association. The monthly fees payable by
Subfranchisor to the advertising cooperative have been established by population
and will range from $100.00 per month to $500.00 per month. Subfranchisor's fee
shall be $_________ per month for the Territory as defined herein. Subfranchisor
hereby agrees to pay such fees as incurred.
INWITNESS WHEREOF, the parties hereof have executed this agreement as of
the date of execution by Franchisor.
MAUI TACOS INTERNATIONAL, INC.
__________________________ By:______________________________________
Date of Execution Vice President
Subfranchisor Corp. Name
Executed as of the date first
above written. By:______________________________________
Individual Name, President
Agreed to by all corporate officers and shareholders:
By: ______________________________
Stockholder
__________________________________
Address
By: ______________________________
Stockholder
__________________________________
Address
23
Exhibit 10.47
FRANCHISE AGREEMENT
THIS AGREEMENT made this ~day of Month, ______, by and between Pasta
Central Co., an unincorporated division of Blimpie International, Inc., a New
Jersey corporation, located at 740 Broadway, 12th Floor, New York, New York
10003 ("Franchisor"), and Corporation located at Address ("Operator," as also
defined in Article 10):
DEFINITIONS
In this Agreement the following capitalized terms shall have the meanings
set forth below, unless the context otherwise requires:
(i) A Pasta Central Branded Product is any product now existing or
developed in the future that bears Franchisor's Marks and is sold by some or all
Pasta Central Franchisees or Franchisor or other entities authorized by
Franchisor, such as supermarkets, grocery stores or convenience stores.
(ii) A Pasta Central Distribution Point or Distribution Point is any
system other than a Pasta Central Restaurant, where Authorized Pasta Central
Products using Franchisor's Marks are sold, such as carts, kiosks, vending
machines or other product distribution systems developed now or in the future
and authorized by Franchisor.
(iii) A Pasta Central Restaurant is a restaurant or other outlet, whether
a Traditional Restaurant or a Nontraditional Restaurant, that specializes in the
sale of Authorized Pasta Central Products, as defined below, that is operated
under Franchisor's Marks, as defined below, and is authorized by a Franchise or
License Agreement made or approved by Franchisor.
(iv) A Nontraditional Restaurant is a Pasta Central Restaurant located
within another primary business or in conjunction with other businesses, some of
which may be other fast-food type operations.
(v) A Traditional Restaurant is a business premises that exists primarily
as a Pasta Central Restaurant. However, such Traditional Restaurant may also
have other types of businesses located in it, but in such case the Pasta Central
Restaurant is the primary business.
(vi) A System Restaurant is a Pasta Central Restaurant from which Pasta
Central Authorized Products are sold for on-premises or off-premises
consumption, and from which Authorized Pasta Central Products may be delivered
for off-premises consumption.
(vii) Authorized Products or Pasta Central Authorized Products are
products approved or authorized by Franchisor in accordance with Article 5 or 8
of this Agreement.
WHEREAS, Franchisor is the owner of the trademark "Pasta Central", for
which an application for registration has been filed with, or a registration has
been issued by the United States Patent and Trademark Office of the United
States of America, and Franchisor may in the future
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become the owner, licensee and/or authorized distributor for related trademarks,
including logos and designs (collectively, "Franchisor's Marks"); and
WHEREAS, Franchisor has developed and continues to develop a system for
merchandising Pasta Central authorized products, which system includes
distinctive signs, food recipes, uniforms, and various trade secrets and other
confidential information, and in some cases also includes architectural designs,
equipment specifications, layout plans, inventory, record-keeping and marketing
techniques (the "System"). The System is materially reflected in Franchisor's
Operations Manual, Local Restaurant Marketing Manual and Construction Manual
(collectively, the "Manuals"). Franchisor identifies the System by Franchisor's
Marks, and such other trademarks, service marks, trade names, logos and designs
as may be designated by Franchisor in writing as being authorized for use under
the System. Franchisor's Marks identify for the public the source of the
services rendered in accordance with the standards and specifications
established by Franchisor; and
WHEREAS, the System as used in existing Traditional and Nontraditional
Pasta Central Restaurants and Pasta Central Distribution Points have established
or will establish a reputation for quality, cleanliness, appearance and service,
and through such operations and continued marketing and advertising efforts,
have created demand and goodwill for the authorized Pasta Central food products
sold as a result of which the System has acquired valuable goodwill and a
favorable reputation; and
WHEREAS, Operator desires to enjoy the benefits of (i) operating under the
System and using Franchisor's Marks, and (ii) being authorized and licensed to
operate one System Restaurant as set forth below within the System in strict
accordance with the standards and specifications established by Franchisor; and
WHEREAS, Franchisor is willing to grant Operator a license under
Franchisor's Marks and the System, subject to Operator's strict compliance with
the terms and conditions of this Agreement.
NOW, THEREFORE, the parties agree as follows:
ARTICLE 1. FRANCHISE RIGHT GRANTED, LOCATION.
1.1 GRANT.
In consideration of the issuance of the franchise granted herein, Operator
shall pay to Franchisor the non-refundable sum of $Price (the "Initial Fee"). In
exchange, Franchisor hereby awards Operator the exclusive right to open and
operate, under the terms of this Agreement, one System Restaurant specializing
in selling high quality limited and specific food items as specified by
Franchisor in Franchisor's Operations Manual, or subsequently added in
accordance with Operations Manual amendments, under the name Pasta Central at a
location to be mutually agreed upon by both parties. No exclusive or protected
market is intended to be granted by this Article. The Initial Fee shall be
deemed fully earned by Franchisor upon the execution of this Agreement by
Franchisor and Operator and shall not be refunded, in whole or in part, upon any
termination of this Agreement, or at any other time or under any other
circumstances.
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1.2 LICENSE.
Franchisor hereby grants and awards to Operator, for the term set forth in
this Agreement, and any renewal term, beginning on the date of this Agreement,
the right and license, and Operator hereby undertakes the obligation, to operate
the business described in this Agreement under Franchisor's Marks and such other
of Franchisor's Marks as may be designated by Franchisor, to operate such
business solely in accordance with the System, and only at the specific location
to be agreed upon by Franchisor and Operator (the "Location").
1.3 LOCATION.
No Location has been agreed upon at the time of the execution of this
Agreement unless set forth and identified in this Agreement or an attached
rider. Upon the leasing of the Location, Operator agrees to sublet the Location
from an independent corporation designated by Franchisor, on the approved
sublease form annexed to Franchisor's Uniform Franchise Offering Circular (the
"UFOC", as further defined in Article 18). Any material violation of the
sublease that is not cured after notice is given and within the applicable grace
periods, as required by the terms of the sublease for the Location, is a
violation of this Agreement. The signing of the sublease for the Location, or
Operator's or any of its principle stockholder's or officer's written approval
of the master lease for the Location, shall constitute Operator's approval of
the Location. Operator shall engage only in the business of operating a System
Restaurant at the Location and no other, except with Franchisor's prior written
consent. Operator acknowledges its sole responsibility for finding the Location
and that Franchisor is not obligated to directly or indirectly obtain an
approved location for Operator. Franchisor's area subfranchisor, if any, as
identified herein, however, may voluntarily (without obligation) assist Operator
in obtaining an approved location, as well as other approved locations for other
System Restaurant operators who have executed existing franchise agreements.
ARTICLE 2. INSTALLATION AND COMMENCEMENT OF BUSINESS.
Operator, at its own expense, shall (i) renovate the Location into a
System Restaurant; (ii) obtain all necessary governmental permits and licenses
prior to beginning the renovation of its Location into a System Restaurant and
Operator shall fully complete the renovation, construction and equipping within
a reasonable time thereafter. Operator shall commence operation of each System
Restaurant no later than thirty (30) days following substantial completion of
the renovation and equipment installation at the Location, and shall give
Franchisor ten (10) days written notice prior to commencing operations. In no
event shall Operator construct or remodel the interior or exterior of any System
Restaurant or make any improvements which vary from the then-current standards,
plans, and specifications approved by Franchisor, without first obtaining
Franchisor's prior written approval. Operator, at its own expense, shall obtain
all municipal and state licenses necessary to operate Operator's System
Restaurant prior to commencing business at its System Restaurant and shall
maintain all licenses in full force and effect during the term of this
Agreement.
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ARTICLE 3. TRAINING.
3.1 Operator will designate individuals (up to 4 persons) as trainee(s) to
attend Franchisor's training school in Atlanta, Georgia (the "Pasta Central
Training School") or at another training location selected by Franchisor.
Franchisor will offer initial training programs for Operator and its management
employees at times selected by Franchisor. Franchisor will bear the costs of
providing training programs, including the overhead costs of training, staff
salaries, materials, and all technical training tools. Operator shall pay all
traveling, living, compensation, and other expenses incurred by Operator and/or
Operator's employees in connection with attendance at training programs. The
training program and manner of conducting such program shall be at Franchisor's
sole discretion and control. The training course will be structured to provide
practical training in the implementation and operation of a System Restaurant.
3.2 Operator will not allow any System Restaurant to be opened or managed
by any person who has not attended and successfully completed the management
training course designated by Franchisor. If Operator is an individual, and does
not manage its System Restaurant on a day-to- day basis, and in the event its
designated System Restaurant manager resigns or is terminated, Operator must
arrange to have the successor restaurant manager (i) begin the required training
course within forty-five (45) days of first assuming the duties of a restaurant
manager and (ii) successfully complete the course. Provided Operator
successfully completes the training program, the required training course
conducted at Franchisor's facilities will not extend beyond two (2) weeks.
However, the course conducted at Franchisor's facilities, requires an additional
96 hours of operational training in a Franchisor-approved System Restaurant.
3.3 If at any time the trainee voluntarily withdraws from, or is unable to
complete its training, or fails to demonstrate an aptitude, spirit or ability to
comprehend and carry out the course of study to the reasonable satisfaction of
Franchisor, then Franchisor shall have the right to require Operator's trainee
to attend other training class(es) or to perform additional operational training
until Franchisor is reasonably satisfied that Operator's trainee has
satisfactorily completed the training course. Operator may not open its System
Restaurant until training is completed to Franchisor's reasonable satisfaction.
3.4 In the event of a sale to a third party of Operator's System
Restaurant after opening, the transferee must be trained in the Pasta Central
Training School as a condition of Franchisor's consent to such transfer. All
tuition costs for such training shall be deemed paid upon receipt by Franchisor
of five (5%) percent of the sales price of operator's System Restaurant due in
accordance with Article 14 herein. In the event of an approved non-sale
management transfer to a third party of Operator's System Restaurant, the
transferee shall attend the Pasta Central Training School and pay to Franchisor
the training fee, which fee shall not exceed $1,500. No System Restaurant shall
open or re-open until the Pasta Central Training School certifies that the
transferee is approved to operate the respective System Restaurant.
3.5 Additional training sessions are available at Operator's request and
expense, and at Franchisor's request, at Operator's expense, except for the
initial training course itself. Operator's attendance at additional training
sessions is mandatory if they are scheduled in Operator's state. For these
additional training sessions, Franchisor will provide the instructors and
instructional materials,
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but Operator must arrange for transportation, lodging and food for itself and/or
its manager. The cost will depend on the distance Operator must travel and the
type of accommodations Operator chooses. Additionally, all Operators must attend
regional meetings when and if established by Franchisor, and must attend annual
national conventions when and if scheduled, and pay the registration fee.
ARTICLE 4. MANUALS AND STANDARDS OF OPERATOR
QUALITY, CLEANLINESS AND SERVICE.
4.1 STANDARDS.
In order to promote the value and goodwill of Franchisor's Marks and the
System and to protect Franchisor's Marks and the other Pasta Central operators
who comprise the Pasta Central franchise system, Operator agrees to conduct its
business in accordance with the standards promulgated by Franchisor as follows:
4.2 MANUALS.
4.2.1 In the Manuals and other publications, Franchisor will list
authorized products to be sold by Operator, and promulgate standards of
operation for System Restaurants, including standards of quality, cleanliness,
and service for all food, beverages, furnishings, interior and exterior decor,
supplies, fixtures, and equipment used in connection with each System
Restaurant. Operator agrees to operate its System Restaurant in accordance with
the standards, specifications and procedures set forth in the Manuals, this
Agreement and the sublease for the Location. Operator further agrees that
changes in the menu, or the standards, specifications and procedures may become
necessary from time to time and agrees to accept as reasonable all
modifications, revisions and additions to the Manuals as authorized by
Franchisor. The sale of any product or service at the Operator's Location,
without Franchisor's prior written approval shall constitute a material
violation of this Agreement.
4.2.2 The Manuals and all amendments to the Manuals (and copies thereof)
are copyrighted and remain Franchisor's property. They are loaned to Operator
for the term of the Agreement, and must be returned to Franchisor upon the
Agreement's termination, expiration or nonrenewal. The Manuals are highly
confidential documents which contain certain trade secrets of Franchisor, and
Operator shall never reveal, and shall take all reasonable precautions, both
during and after the term of this Agreement, to assure that its employees or any
other party under Operator's control, shall never reveal any of the contents of
the Manuals or any other publication, recipe or secret provided by Franchisor,
except as is necessary for the operation of Operator's System Restaurant.
4.3 HOURS.
Franchisor and Operator agree that the hours of operation of Operator's
System Restaurant are at a minimum, 10:00 am. to 12:00 p.m. (midnight), 7 days
per week, and Operator agrees to operate its System Restaurant during such
hours. If the Location is in a mall or shopping center, the hours of the mall or
shopping center shall control. Operator shall diligently and efficiently
exercise
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its best efforts to achieve the maximum gross sales possible from its location,
and will be open for business not less than 14 hours per day, seven days per
week, unless additional opening hours are reasonably required to maximize
operations and sales. If such hours are incorrect in relation to the sales
potential of Operator's System Restaurant, then Franchisor and Operator shall
reasonably adjust such hours by jointly establishing new hours of operation. It
is acknowledged that the hours of other operators will vary in relation to each
respective location, and local legal restrictions, if any.
4.4 APPEARANCE.
From time to time, Operator's System Restaurant may need a cosmetic
improvement or equipment change or addition in order to comply with the Manuals
and/or to maintain proper operations and an aesthetic appearance and
professional image. Accordingly, Franchisor may require remodeling and
renovation, and modifications to existing equipment and improvements as is
reasonably necessary. Franchisor shall not require any such work at a particular
System Restaurant less than three (3) years after the opening of the System
Restaurant except: (i) for additional equipment if new food preparation methods
or products are developed and authorized by Franchisor; (ii) if repairs or
repainting are necessary to maintain the appearance of the interior and exterior
of the Location in a clean and orderly condition satisfactory to Franchisor; or
(iii) upon the sale of the Operator's System Restaurant. Within ninety (90) days
after receipt of written notice, Operator shall fully implement and complete
such changes to its System Restaurant operating under this Agreement.
4.5 PRODUCT LINE AND SERVICE.
Operator agrees to only serve the approved limited product line items
specified by Franchisor in this Agreement or in the Manuals and to follow all
specifications and formulas of Franchisor as to specifications, contents, weight
and quality of products served to its customers from Operator's System
Restaurant.
4.6 CONTAINERS, FIXTURES AND OTHER GOODS.
4.6.1 Operator agrees that all food and drink items will be served in
containers bearing accurate reproductions of Franchisor's Marks. All containers,
napkins, bags, cups, matches, menus and other packaging and like articles used
in connection with Operator's System Restaurant shall conform to Franchisor's
specifications, shall be imprinted with Franchisor's Marks and shall be
purchased by Operator from a distributor or manufacturer approved in writing by
Franchisor, as provided in Article 8, which approval will not be unreasonably
withheld.
4.6.2 No item of merchandise, furnishings, interior and exterior decor
items, supplies, fixtures, equipment or utensils bearing any of Franchisor's
Marks shall be used in or upon any System Restaurant unless the same shall have
been first submitted to and approved in writing by Franchisor.
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ARTICLE 5. MENUS, UNIFORMS, INSPECTIONS, SIGNS.
5.1 MENUS.
5.1.1 Operator shall not manufacture, advertise for sale, sell or give
away any product unless such product has been approved in the Manuals as an
authorized product for sale in Operator's System Restaurant and not thereafter
disapproved in writing by Franchisor. All approved products shall be distributed
under the specific name designated by Franchisor. Operator shall establish all
menu prices in its sole discretion. Operator shall offer for sale in its System
Restaurant only those food products which Franchisor designates as "approved and
authorized" or which Franchisor has made available as a "regionalized" menu or
has otherwise specifically approved in writing (each, "Authorized Product"). No
standard product will be removed from the menu unless Operator is so instructed
by Franchisor.
5.1.2 Such "Authorized Products" shall be marketed by approved menu
formats to be utilized in Operator's System Restaurant. The approved and
authorized menu and menu format(s) may include, in Franchisor's discretion,
requirements concerning organization, graphics, product descriptions,
illustrations, and any other matters (except prices) related to the menu,
whether or not similar to those listed. In Franchisor's discretion, the menu
and/or menu format(s) may vary depending upon region, market size, and other
factors. Franchisor may change the menu and/or menu format(s) from time to time
or region to region or authorize tests from region to region or authorize
non-uniform regions or non-uniform System Restaurant(s) within regions, in which
case Operator will be given a reasonable time (not longer than thirty (30) days)
to discontinue use of any old menu format(s) and implement use of the new menu
format(s).
5.1.3 Operator shall, upon receipt of notice from Franchisor, add any
Authorized Product to its menu according to the instructions contained in the
notice. Operator shall have a minimum of thirty (30) days after receipt of
written notice in which to fully implement any such change. Operator shall cease
selling any previously approved product within thirty (30) days after receipt of
notice that the product is no longer approved.
5.1.4 The Authorized Products sold by Operator shall be of the highest
quality, and the ingredients, composition, specifications, and preparation of
such food products shall comply with the instructions and recipes provided by
Franchisor or contained in Franchisor's Operations Manual, and with the further
requirements of Franchisor as they are communicated to Operator from time to
time.
5.2 COMPLIANCE.
Operator shall operate each of its System Restaurants as a clean, orderly,
legal and respectable place of business in accordance with Franchisor's business
standards and merchandising policies, and shall comply with all applicable
ordinances, laws, statutes and regulations governing the operation of such
premises, including all disability, food and drug laws and regulations. Operator
shall not allow any Location or part of a Location to be used for any immoral or
illegal purpose.
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5.3 SIGNS, DESIGNS AND FORMS OF PUBLICITY.
5.3.1 Operator shall maintain a suitable sign or awning at, on, or near
the front of the Location, identifying the Location as a "Pasta Central
Restaurant". Such sign shall conform in all respects to Franchisor's
requirements and in accordance with the layout and design plan approved for the
Location, except to the extent prohibited by local legal restrictions.
5.3.2 No exterior or interior sign or any design, advertisement, sign, or
form of publicity, including form, color, number, location, and size, shall be
used by Operator or any Association (as defined below) unless first submitted to
Franchisor and approved in writing (except with respect to prices). Any request
by Operator for such approval shall be properly submitted in duplicate to: (i)
Franchisor's Legal Department, Attention: General Counsel, 740 Broadway, New
York, New York 10003; and (ii) Franchisor's marketing department, 1775 The
Exchange, Suite 600, Atlanta, Georgia 30339. Franchisor shall respond to such
request within thirty (30) days of its receipt. Whenever Operator elects to
utilize, in the form supplied, advertising supplied by Franchisor or any
promotional item specifically approved by Franchisor, no further approval for
use of such material is required. Upon written notice from Franchisor, Operator
shall discontinue and/or remove any objectionable advertising materials or any
other materials not suitable for display, in Franchisor's sole discretion.
5.4 UNIFORMS AND EMPLOYEE APPEARANCE.
Operator shall cause all employees, while working in System Restaurants,
to: (i) wear uniforms of such color, design, and other specifications as
Franchisor may designate from time to time, and (ii) present a neat and clean
appearance. If the type of uniform utilized by Operator is removed from the list
of approved uniforms, Operator shall have sixty (60) days from receipt of
written notice of such removal to discontinue use of its existing inventory of
uniforms and implement the approved type of uniform.
5.5 VENDING OR OTHER MACHINES.
Operator shall not permit vending or game machines or any other mechanical
device to be installed or maintained in its Location without Franchisor's prior
written approval
5.6 INSPECTION.
5.6.1 Franchisor's authorized representatives shall have the right to
enter upon the entire main floor and basement of Operator's System Restaurant
during business hours, without disrupting Operator's business operations, for
the purposes of examining same, conferring with Operator's employees, inspecting
and checking operations, food, beverages, furnishings, interior and exterior
decor, supplies, fixtures, and equipment, and determining whether the business
is being conducted in accordance with this Agreement, the System and the
Manuals.
5.6.2 In the event any such inspection indicates any deficiency or
unsatisfactory condition with respect to any matter required under this
Agreement or the Manuals, including but not limited to quality, cleanliness,
service, health and authorized product line, Franchisor will notify Operator in
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writing of Operator's non-compliance with the Manuals, the System, or this
Agreement. Operator shall have twenty-four (24) hours after receipt of such
notice, or such other greater time period as Franchisor in its sole discretion
may provide, to correct or repair such deficiency or unsatisfactory condition,
if it can be corrected or repaired within such period of time. If not, Operator
shall within such time period commence such correction or repair and thereafter
diligently pursue it to completion.
ARTICLE 6. ADVERTISING AND FRANCHISEE ASSOCIATIONS.
6.1 Operator and Franchisor acknowledge the value of advertising and
accordingly Operator agrees to pay 4% of its gross sales for each and every week
of its operations to Franchisor (the "Advertising Fee"). These funds will be
deposited, at Franchisor's sole discretion, into a segregated advertising
account (with other advertising collections) controlled by Franchisor or to a
regional advertising cooperative covering Operator's System Restaurant.
Advertising payments will then be spent for advertising to benefit Operator
and/or all or regional operators of System Restaurants. The Advertising Fee
shall be paid in accordance with the procedure described in Article 9.
6.2 Franchisor, at its sole discretion, may spend the collected fees
directly, or may authorize payment of the advertising collections for media
time, production of media materials, whether for radio, television, newspapers
or store level materials such as flyers, or posters, or for any other type of
advertising or marketing use. Franchisor is not, under any circumstances,
obligated to contribute to any national or local advertising fund, program,
Association, or other organization any advertising fees or contributions.
6.3 Franchisor encourages the formation and operation of voluntary
Operator Cooperative Advertising Associations (each an "Association"). Each
Association shall function for the purpose of creating a cohesive team to
coordinate advertising, marketing efforts and programs and maximizing the
efficient use of local advertising media. If an Association is formed for
Operator's region, each Operator must participate in the Association or lose its
right to vote as to decisions regarding advertising and marketing efforts and
programs.
6.4 If requested, Franchisor will assist in establishing an Association or
otherwise assist in deciding how to allocate all or part of the advertising
funds paid by Franchisor to the Association (such funds will be paid to each
Association at the Franchisor's sole discretion, who is entitled to expend the
funds at its sole discretion in accordance with the provisions of this
Agreement). If Franchisor elects to pay all or a portion of the advertising
collections to an Association and if one of the following events occurs and is
not resolved by the Association, then Franchisor reserves the right to exercise
sole decision-making power over the advertising funds: (i) if an Association
ceases functioning; or (ii) an impasse arises because of the inability or
failure of the Association members to resolve any issue affecting the
establishment or effective functioning of an individual Association; or (iii) an
Association fails to function in a productive or harmonious manner; or (iv) an
Association is unable to approve any advertising program within a reasonable
time not to exceed thirty (30) days. Franchisor reserves the right to establish
general standards concerning the operation of all Associations, advertising
agencies retained by Associations, and advertising
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programs conducted by Associations. No decisions shall be made or advertising
funds spent without Franchisor's prior written approval. Franchisor charges $10
per restaurant per month to each Association as a
reimbursement/collection/service fee before distributing the collected moneys to
each Association.
6.5 Operator acknowledges receipt of Franchisor's UFOC which refers to (a)
Pasta Central Brand Building Fund, Inc. ("PCBBFI"); (b) and the Council of Pasta
Central Suppliers; (c) a research and development fund; (d) the Grand Opening
event, and (e) the Initial Program as explained below.
6.5.1 PCBBFI is the non-profit entity authorized to receive marketing
allowances and payments from Pasta Central distributors, manufacturers and other
entities that are associated in business, directly or indirectly, with
Franchisor or the System or its operators or any part thereof. The activities of
PCBBFI are controlled by Franchisor as consulted and advised by Pasta Central
operators elected to the Pasta Central Franchisee Advisory Council and
subfranchisors elected to the Pasta Central Subfranchisor Advisory Council
(collectively the "Council"). By execution of this Agreement, Operator consents
to the receipt of such funds by PCBBFI or its successors, as well as the
expenditure thereof for advertising and marketing expenses. These expenses may
include costs for personnel, management fees, advertising agencies, operating
expenses, matching fund programs, research and development, administrative
expenses, production of educational or training materials, production of
commercials, focus groups or other studies, the purchase of television or radio
or other media time, print advertising, restaurant design studies or
modifications, consultants and such other marketing and advertising uses as may
be authorized by Franchisor. If there is a refusal or inability to participate
in such decisions by the Council or portions thereof, or if there are no elected
representatives of franchisees or subfranchisors, Franchisor is hereby granted
the power and authority to authorize expenditures of the fund without such
consultation or advice.
6.5.2 By execution of this agreement, Operator consents to the formation
and existence of the Pasta Central Brand Building Fund, Inc., its right and
privilege to seek voluntary contributions of 1% to 3% of gross sales, or any
higher fee or a flat fee if a sales percentage is not practical, from all PASTA
CENTRAL manufacturers, distributors, vendors and purveyors who sell products or
provide services to the PASTA CENTRAL System or Pasta Central Brand Building
Fund, Inc., and the system of authorizing utilization of these collections and
any resulting expenditures thereafter.
6.5.3 The Council of Pasta Central Suppliers is an association composed of
approved manufacturers, distributors and the Franchisor, established for the
purposes of improving communication between manufacturers and distributors, and
improving distribution and development of improved Authorized Products. This
Council reimburses Franchisor for employee and other expenses involved in the
distribution and manufacturing of Raw Materials. Operator consents to the
receipt of such funds by Franchisor;
6.5.4 Franchisor and certain manufacturers have established or may agree
to establish a research and development fund for improvement of specific
Authorized Products and Operator consents to Franchisor's receipt of
reimbursement funds arising from expenses incurred in such research and
development.
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6.5.5 In addition to the Advertising Fee, Operator agrees to spend a
minimum of $4,000 for its "Grand Opening" promotion as designated by Franchisor.
The "Grand Opening" event is required for all operators and functions to
introduce Operator's System Restaurant to the public. The application and use of
the "Grand Opening" funds shall be controlled by Franchisor's marketing
department.
6.5.6 During the first twelve months after the opening of its System
Restaurant, Operator agrees to implement an initial local restaurant marketing
plan which includes coupon and monthly events (the "Initial Program"). To fund
the Initial Program, commencing two weeks after the opening of its System
Restaurant, Operator agrees to pay Franchisor the sum of $2,000 by paying $40
per week for 50 consecutive weeks, in accordance with the procedures established
in Article 9. The application and use of the Initial Program funds shall be
controlled by Franchisor's marketing department or its designee.
ARTICLE 7. COMPANY MARKS AND ADDITIONAL MARKS.
7.1 The license and related rights to use the System, the Manuals,
Franchisor's Marks and any other proprietary products granted by this Agreement
are applicable only with respect to Operator's System Restaurant at the
Location, and not elsewhere, except in the event of a relocation approved in
writing by Franchisor. This Agreement does not authorize the use of mobile
vending vehicles, carts, kiosks or any other non-traditional delivery systems.
7.2 Operator shall not interfere in any manner with, or attempt to
prohibit, the use of Franchisor's Marks by any other Operator of Franchisor or
in connection with Nontraditional Pasta Central Restaurants, distribution points
or any other system used to distribute Pasta Central authorized or branded
products.
7.3 Franchisor may, from time to time, in Franchisor's sole discretion,
obtain additional trademark and/or service mark rights in words and/or designs.
In the event of any of these occurrences, Franchisor may license Operator to use
those trademarks or service marks by giving written notification to Operator
that such marks now form part of Franchisor's Marks. The term of such license
will be coextensive with the term of this Agreement or as otherwise established
by Franchisor, and will be subject to all restrictions with respect to the use
of those rights as set forth in this Agreement and in the notice granting
Operator the license.
ARTICLE 8. DISTRIBUTION AND PURCHASE OF EQUIPMENT,
SUPPLIES, AND OTHER PRODUCTS.
Operator agrees to use only Franchisor's approved products and portion
control formulas in the preparation of Authorized Products. Operator further
agrees to only buy Raw Materials, as defined below, manufactured in accordance
with Franchisor's specifications from approved manufacturers, distributed by
approved distributors, and sold to Operator as follows:
8.1 DEFINITIONS.
8.1.1 For the purpose of this Agreement, "distributor" is defined as any
entity, except a
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manufacturer, that directly or indirectly delivers raw materials to the
Operator. A "manufacturer" is defined as the entity that manufactures and/or
sells the raw materials to a distributor. Raw Materials means all of the
products purchased from distributors, and/or manufactured or sold by
manufacturers or production entities which are used in the creation of
Authorized Products. Raw Materials include, but are not limited to printed paper
goods, meats (cooked and uncooked), cheeses, produce, pastas (cooked or
uncooked), seafood, bakery products, grocery items, clothing, processed foods,
dressings, desserts, seasonings, spices, condiments, sauces, frozen entrees,
prepared entrees, packaged entrees, frozen meals, prepared meals, packaged meals
and such other items as designated by Franchisor as Raw Materials (collectively,
the "Raw Materials"). "Authorized" means approved by Franchisor in accordance
with the procedures established in this Agreement.
8.2 DISTRIBUTORS.
8.2.1 Operator acknowledges that it is generally unrealistic from a cost
and service basis to have more than one distributor in the market area of
Operator's System Restaurant, and that to obtain the lowest distribution costs,
all regional operators should only purchase from one authorized Pasta Central
distributor. Operator agrees to only purchase all equipment, supplies, Raw
Materials and other products and materials necessary for the operation of its
System Restaurant solely from Authorized distributors, and other authorized
sources who demonstrate, to the continuing reasonable satisfaction of
Franchisor, the ability to meet Franchisor's then-current standards and
specifications for such items; who possess adequate quality controls and
capacity to supply Operator and all other System operators needs promptly and
reliably; who demonstrate the ability and willingness to work with Franchisor to
provide the assistance needed by the those operators in the region and all other
System Operators; who agree to distribute all authorized Pasta Central products;
who comply with Franchisor's reasonable requirements; and who have been approved
in writing by Franchisor and not thereafter disapproved.
8.2.2 If Operator desires to purchase any items from an unapproved
distributor, whom Operator desires to become an Authorized distributor, Operator
shall first submit a written request, in duplicate, for such approval to
Franchisor, addressed to (i) President: 740 Broadway, New York, New York 10003,
and (iii) General Counsel, 740 Broadway, New York, New York 10003, accompanied
by a similar written request for approval from the proposed distributor.
Franchisor shall have the right to require that the proposed distributor provide
reasonable financial, operational and economic information regarding its
business and that Franchisor's representatives be permitted to inspect the
proposed distributor's facilities and establish economic terms, delivery,
service and other requirements consistent with other distribution relationships
for other system restaurants. The proposed distributor shall pay to Franchisor
in advance all of Franchisor's reasonable costs in review of the application of
the distributor to service the Operator as well as all current and future
reasonable costs related to inspecting and reinspecting the distributor's
facilities, equipment, Raw Materials in the distributor's possession at any
time. Franchisor may revoke its approval upon the distributor's failure to
continue to meet any of Franchisor's criteria. Nothing in this article shall
require Franchisor to approve any distributor. Upon the receipt by Franchisor of
Operator's and the proposed distributor's request for approval in full
compliance of this article and the completion of all of the inspections needed
by Franchisor to evaluate the distributor, Franchisor will notify Operator of
its decision within 90 days after the receipt of a completed request for
approval or the completion
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of inspections (if required). In the event an alternate approved distributor to
the recommended distributor is used by Operator, as a condition thereof Operator
and all other operators shall authorize the alternate distributor to provide to
Franchisor duplicate purchase invoices for Franchisor's records and inspection
purposes and to otherwise comply with Franchisor's reasonable requests.
8.3 MANUFACTURERS.
8.3.1 The parties agree that Franchisor's product specifications and
portion control system are highly confidential information and are trade secrets
of Franchisor. In order to (i) achieve appropriate pricing, (ii) obtain the
specially formulated Pasta Central authorized Raw Materials for Operator and all
of Franchisor's System Restaurants, and (iii) establish consistent uniformity of
Pasta Central products, Operator acknowledges that purchasing by all System or
regional operators from approved manufacturers is a necessity. Because of the
importance of quality and uniformity of product and the significance of product
specifications and portion control in the preparation of Authorized Products to
achieve and maintain such quality and uniformity, it is to the mutual benefit of
the parties that Franchisor closely control the production and distribution of
the Raw Materials used to produce authorized products sold by Operator. Similar
considerations may also apply to other products which Franchisor may develop in
the future. Operator therefore agrees to purchase only Raw Materials
manufactured in accordance with Franchisor's specifications and quality
standards by approved manufacturers who demonstrate, to the continuing
reasonable satisfaction of Franchisor, the ability to meet Franchisor's
then-current standards and specifications for such items; who possess adequate
quality controls and capacity to meet the needs of Operator and all other System
Operators in a given region or territory promptly and reliably; who demonstrate
the ability and willingness to work with Franchisor and to provide the
assistance needed by the Pasta Central System and who have been approved in
writing by Franchisor and not thereafter disapproved.
8.3.2 If Operator desires to purchase any items from an unapproved
manufacturer, who Operator desires to become an Authorized manufacturer,
Operator shall first submit a written request, in duplicate, for such approval
to Franchisor, addressed to (i) President: 740 Broadway, New York, New York
10003 and (ii) to General Counsel, 740 Broadway, New York, New York 10003
accompanied by a similar written request for approval from the proposed
manufacturer. Franchisor shall have the right to require that the proposed
manufacturer provide reasonable financial, operational and economic information
regarding its business and that Franchisor's representatives be permitted to
inspect the proposed distributor's facilities and establish economic terms,
delivery, service and other requirements consistent with other with other
manufacturing relationships for other system restaurants. The proposed
manufacturer shall pay to Franchisor in advance all of Franchisor's reasonable
costs in review of the application of the manufacturer to service the Operator
as well as all current and future reasonable costs related to inspecting and
reinspecting the manufacturer's facilities, equipment and Raw Materials at any
time. Franchisor may revoke its approval upon the manufacturer's failure to
continue to meet any of Franchisor's criteria. Nothing in this article shall
require Franchisor to approve any manufacturer. Upon the receipt by Franchisor
of Operator and the proposed manufacturer's request for approval in full
compliance of this article and the completion of all of the inspections needed
by Franchisor to evaluate the manufacturer, Franchisor will notify Operator of
its decision within 90 days after completion of such application and
inspections. If an alternate approved manufacturer to the recommended
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manufacturer is used by Operator, as a condition thereof Operator and all other
operators shall authorize the alternate manufacturer to provide to Franchisor
duplicate purchase invoices for Franchisor's records and inspection purposes and
to otherwise comply with Franchisor's reasonable requests.
8.4 PURCHASE OBLIGATIONS.
Operator agrees to purchase the following items from the approved distributor
and manufacturer designated by Franchisor:
8.4.1 all Branded Pasta Central Products that bear Franchisor's Marks;
Franchisor has a long term strategic plan to create another profit center for
Operator as to in-store sales in System Restaurants and by the sale of Pasta
Central branded products in other retail and wholesale locations, such as
supermarkets, grocery stores, etc. To accomplish this goal, Franchisor intends
to develop such products. To effectuate this long term strategy, Operator agrees
to cooperate with Franchisor with respect to the purchase, display and sale of
any Branded Products authorized for sale by Franchisor. Operator consents to the
receipt by Franchisor of licensing fees from manufacturers who manufacture
Branded Products, which fees compensate Franchisor for such use of Franchisor's
Marks.
8.4.2 certain Pasta Central standard exterior and interior signs; These
signs require the prior fabrication of sign molds or advance production in
quantity to be either affordable or promptly available. If Franchisor has
entered into an agreement with approved sign manufacturer(s), granting rights to
use Franchisor's Marks in connection with the signs and to sell such signs to
Pasta Central operators, Operator agrees to purchase its signs from the
authorized sign manufacturer(s).
8.4.3 Coca-Cola fountain service products: Franchisor has entered into an
exclusive agreement with the Coca-Cola Company to be the only approved fountain
service beverage supplier to the Pasta Central System. Operator agrees to only
use the fountain service Coca-Cola products authorized by Franchisor and no
other beverages, unless replacement or additional beverages are approved in
writing by Franchisor.
8.4.4 Operator agrees that at such times that Franchisor establishes a
regional or national purchasing program for any of the Raw Materials, which may
benefit Operator by reduced price, lower labor costs, production of improved
Authorized Product(s), increased reliability in supply, improved distribution,
Raw Material cost control (establishment of consistent pricing for reasonable
periods to avoid market fluctuations), improved operations by Operator or other
tangible benefits to Operator, Operator will participate in such purchasing
program in accordance with the terms of such program.
ARTICLE 9. CONTINUING FRANCHISE FEES, REPORTS,
BOOKS AND RECORDS.
9.1 CONTINUING FRANCHISE FEES.
9.1.1 Operator shall pay to Franchisor weekly during the term of this
Agreement and any
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renewals or extensions thereof, 6% of the weekly gross sales of Operator's
System Restaurant. For the purposes of this Agreement, "gross sales," means
gross revenues (excluding price discounts and allowances) received by Operator
as payment, whether in cash or for credit (and, if for credit, whether or not
payment is received therefor), for all beverages, food, and other goods,
services, and supplies including all sales from approved co-brands as described
in Article 23 sold in or from each of Operator's System Restaurants, and gross
revenues received by Operator from any other business (including, but not
limited to, all revenues from any mechanical or other device, such as vending or
game machines installed at the Location) operated at the Location, excluding
sales taxes.
9.1.2 At Franchisor's request, Operator shall promptly execute or
re-execute within five (5) days after Franchisor's request, and deliver to
Franchisor appropriate pre-authorized check forms or such other instruments or
drafts required by Franchisor's bank, payable against Operator's bank account,
to enable Franchisor to electronically (draft on Operator's account by
electronic withdrawal), collect the 6% and 4% (see Article 6) of gross sales
payable under the terms of this Agreement. At Franchisor's request, Operator
shall, within 5 days after such request, promptly perform such acts as to enable
Franchisor or its designee to connect its computers to Operator's computer(s) or
Operator's POS System so that Franchisor or its designee may electronically
obtain statistical information regarding Operator's business activities that
Franchisor may in its sole discretion may seek to obtain. Operator agrees to not
disconnect Franchisor or its designee from such connection or phone line at any
time, for any reason, without Franchisor's prior written approval. Operator
specifically authorizes Franchisor to either "upload" or "download" information
in and from or to its computers, cash registers or other such devices as allowed
by law, as it relates to the System Operation by internet, intranet and other
networks or other means as they become available.
9.1.3 Operator shall report its gross sales by telephone within two (2)
days after the end of each business week (currently Tuesday) or at such other
times as are established by Franchisor in its sole discretion. Operator shall
submit written weekly summaries showing results of its operations by the
following Saturday. If Operator fails to report its sales on a timely basis,
Franchisor may estimate the amount of Operator's sales. Franchisor will then
deposit or transfer the reported, or in the absence of a report, the estimated,
amounts due into its own account, using the System Operator's pre-authorized
checks or other instruments. If any draft, electronic or otherwise, is unpaid
because of insufficient funds or otherwise, then Operator shall pay Franchisor's
expenses arising from such non-payment, including bank fees in the amount of at
least $30, hourly staff charges arising from such default, and any other related
expenses incurred by Franchisor. By the 5th day of each month Operator shall pay
to Franchisor any sums unpaid for the prior month to adjust for sales owed for
any partial week or sales that were unpaid, improperly recorded or not credited
on Operators books and records. Operator hereby agrees to pay any sales, use or
other tax now or hereinafter imposed on franchise fees, advertising fees or any
additional rental collected under the sublease for the Location, imposed by any
Federal, state or local governmental authorities. Franchisor, at its sole
discretion, may collect the taxes in the same manner as franchise fees are
collected herein and if Franchisor collects such taxes, Franchisor shall
promptly pay the tax collections to the appropriate governmental authority.
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9.2 REPORTS AND INSPECTION OF RECORDS.
9.2.1 Operator shall submit to Franchisor a quarterly Profit and Loss
Statement, signed and certified by Operator. The Profit and Loss Statement shall
be prepared by a Certified or Public Accountant, in accordance with generally
accepted accounting principles, and shall provide Operator's sales, expenses and
financial status with respect to Operator's System Restaurant. Operator shall
submit to Franchisor a copy of the original signed 1120 or 1120S tax form each
and every year or any other forms which take the place of the 1120 or 1120S
forms. Operator shall also provide Franchisor with copies of signed original
sales and use tax forms contemporaneously with their filing with the appropriate
state or local authority. Franchisor reserves the right to require such further
information concerning Operator's System Restaurant as Franchisor may from time
to time reasonably request.
9.2.2 Upon 10 days prior written notice, Franchisor, its agents or
representatives may audit Operator's books and records in accordance with
generally accepted standards established by certified public accountants. In
connection with such audit(s) or other operational visits, Operator agrees to
keep its cash receipts records, weekly and monthly control forms, accounts
payable records including all payments to Operator's suppliers in its System
Restaurant or at its business office for three (3) years after their due date,
which records shall be available for examination by Franchisor or its
representative(s), at Franchisor's request. Without any prior written notice,
Franchisor, its agents or representatives may inspect Operator's entire System
Restaurant and Operator's daily, weekly and monthly statistical information
("Redbook Information") which is required under the Operational Manual. Operator
shall make such Redbook Information available for such inspections in
recognition that an operational inspection cannot succeed without review of
essential statistical information.
9.2.3 If any audit or other investigation reveals an under-reporting or
under-recording error of five (5%) percent or more, then in addition to any
other sums due, the expenses of the audit/inspection shall be borne and paid by
Operator upon billing by Franchisor, plus interest at the highest compound rate
authorized by the state in which the System Restaurant is located, but not to
exceed the rate of fifteen (15%) percent per annum.
9.2.4 Operator acknowledges that Franchisor's Operations Department
regularly reviews ongoing operations at System Restaurants to ensure consistency
of products and service and compliance with the Manuals and this Agreement.
Operator therefore agrees to promptly complete and submit all forms requested by
Franchisor's Operations Department, whether on a daily, weekly or monthly basis.
Non-compliance with this obligation constitutes a material violation of this
Agreement.
ARTICLE 10. COVENANT REGARDING OTHER BUSINESS INTERESTS.
10.1 For purposes of this Article only, "Operator" shall mean and include
the individual Operator; Operator's spouse and minor children; Operator's
shareholders, officers, and directors, if Operator is a corporation; and any one
or more partners or participants in Operator, if Operator is a partnership or
joint venture, or members, if Operator is an LLC.
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10.2 Operator acknowledges that the Pasta Central System is unique and
distinctive and has been developed by Franchisor at great effort, time, and
expense, and that Operator has regular and continuing access to valuable and
confidential information, training, and trade secrets regarding the Pasta
Central System. Operator recognizes its obligations to keep confidential such
information as set forth herein. Operator therefore agrees as follows:
10.2.1 During the term of this Agreement, except with Franchisor's prior
written consent, Operator shall not, in any capacity whatsoever, either directly
or indirectly, individually or as a member of any business organization, engage
in the production or sale at retail or wholesale of any Italian type food
product or any other main course item authorized by Franchisor, now or in the
future approved by Franchisor for use in Operator's System Restaurant, or have
any employment or interest in any firm engaged in the production or sale of such
products.
10.2.2 Upon the termination, expiration or nonrenewal of this Agreement,
or if Operator assigns or transfers its interest herein to any person or
business entity, or if any person identified in the first paragraph of this
Article terminates its relationship with Operator, then for a period of sixty
(60) months thereafter such Operator shall not, in any capacity whatsoever,
either directly or indirectly, individually or as a member of any business
organization, engage in the production or sale at retail of any Italian type
food product, or have any employment or interest in any firm engaged in the
production or sale at retail or wholesale of any such products, at a site within
a radius of five (5) miles of any of Operator's former System Restaurants or
within five (5) miles of any other System Restaurant or Distribution Point then
existing, unless Franchisor gives its prior written consent. If Operator
violates the terms of this paragraph, Operator shall pay to Franchisor, as
liquidated damages, an amount equal to $5,000 per month for each month this
covenant is violated, plus six (6%) percent of the gross sales achieved at the
site during the continuation of such violation.
10.2.3 In the event any portion of the above covenants violates laws
affecting Operator, or is held invalid or unenforceable in a final judgment to
which Franchisor and Operator are parties, then the maximum legally allowable
restriction permitted by law shall control and bind Operator. Franchisor may at
any time unilaterally reduce the scope of any part of the above covenants, and
Operator shall comply with any such reduced covenant upon receipt of written
notice.
10.3 The provisions of this Article shall not limit, restrain or otherwise
affect any right or cause of action which may accrue to Franchisor for any
infringement of, violation of, or interference with, this Agreement, or
Franchisor's Marks, System, trade secrets, or any other proprietary aspects of
Franchisor's business.
ARTICLE 11. INTERFERENCE WITH EMPLOYMENT RELATIONS.
Without Franchisor's prior written consent, during the term of this
Agreement, Operator shall not employ or seek to employ, directly or indirectly,
any person serving in an executive, managerial or operational position who is at
the time or was at any time during the prior six (6) months employed by
Franchisor or any of its subsidiaries. Request for Franchisor's consent shall be
sent in duplicate and addressed in writing to Franchisor's Vice-President of
Operations and to its General Counsel.
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ARTICLE 12. SUBFRANCHISORS, SALESMEN.
Inasmuch as this Agreement has not been executed by the Operator at the
office of Franchisor, Franchisor requires certain assurances that this Agreement
has been sold in accordance with applicable laws, rules and regulations.
Accordingly, in order to induce Franchisor to execute this Agreement, Operator
agrees to execute a Rider/Questionnaire to this agreement that acknowledges that
Franchisor is relying upon the acknowledgments, representations and commitments
of Operator that no other salesman, staff member, entity, or associate of
Franchisor has met Operator regarding this franchise sale or the offer and
acceptance thereof other than those set forth therein. The rider shall identify
all sales persons involved in the sales, negotiation and execution of this
Agreement and shall identify the subfranchisor. Franchisor shall be entitled to
rely on the Rider/Questionnaire, and Operator shall be bound by its contents.
ARTICLE 13. LOCAL RESTAURANT MARKETING MANUAL.
Operator acknowledges that Franchisor's local restaurant marketing ("LRM")
manual and other marketing and advertising materials emphasize the
implementation of marketing efforts within a 3-mile radius of Operator's System
Restaurant. Such references, suggestions and emphasis do not directly or
indirectly grant to Operator a protected market or other exclusive right within
such 3-mile marketing area, but rather reflects the reality that Operator's
local marketing activities should initially be commenced in the area immediately
adjacent to its System Restaurant and that such marketing activities may be in
competition with the marketing activities of other Pasta Central operators.
ARTICLE 14. NATURE OF INTEREST, AND TRANSFER.
14.1 GENERAL PROVISIONS.
14.1.1 This Agreement shall inure to the benefit of the successors and
assigns of Franchisor. Franchisor shall have the right to transfer or assign
this Agreement to any person or legal entity who assumes its terms and agrees to
comply with Franchisor's obligations contained herein. Franchisor shall have no
liability for the performance of any obligations contained in this Agreement
after the effective date of such transfer or assignment.
14.1.2 The rights and duties created by this Agreement are personal to
Operator. Accordingly, except as otherwise permitted herein, neither Operator
nor any person with an interest in Operator shall, without Franchisor's prior
written consent, directly or indirectly sell, assign, transfer, convey, give
away, pledge, mortgage, or otherwise encumber any direct or indirect interest in
this Agreement or, if Operator is a partnership, joint venture, LLC or
corporation, any direct or indirect interest in Operator. Any such purported
assignment occurring by operation of law or otherwise without Franchisor's prior
written consent shall constitute a default of this Agreement by Operator, and
shall be null and void. Except in the instance of Operator advertising to sell
its System Restaurant pursuant to the terms hereof, Operator shall not, without
Franchisor's prior written consent, offer for sale or transfer at public or
private auction or advertise publicly for sale or transfer, the furnishings,
interior and exterior decor items, supplies, fixtures, equipment, Operator's
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sublease or the real or personal property used in connection with Operator's
System Restaurant.
14.2 CONSENT TO TRANSFER.
For all proposed transfers or assignments of this Agreement, and transfers
of more than 51% of the outstanding and issued stock of Operator by one or more
transfers or any transfer which, directly or indirectly, effectively changes
management control of Operator, Franchisor will not unreasonably withhold its
consent to any transfer or assignment which is subject to the restrictions of
this Article, provided however, Franchisor shall not be required to give its
consent unless all of the following conditions are met prior to the effective
date of assignment:
14.2.1 Upon the execution of this Agreement and upon each direct or
indirect transfer of an interest in this Agreement or in Operator and at any
other time upon Franchisor's request, Operator shall, within five (5) days prior
to such transfer or at any other time at Franchisor's request, furnish
Franchisor with an estoppel agreement indicating any and all causes of action,
if any, that Operator may have against Franchisor or if none exist and a list of
all shareholders or partners having an interest in this Agreement or in
Operator, the percentage interest of each shareholder or partner, and a list of
all officers and directors, in such form as Franchisor may require.
14.2.2 Operator's written request for transfer of either a partial or
whole interest in this Agreement or Operator's System Restaurant must be
accompanied by an offer to Franchisor of a right of first refusal at the same
price offered by any bona fide buyer less five (5%) percent Franchisor shall
have the right and option, exercisable within fifteen (15) days after receipt of
such written notification, to send written notice to Operator or such person
that Franchisor or its third-party designee, intends to purchase the interest
which is proposed to be transferred, on the same terms and conditions offered by
the third party. If Franchisor accepts such offer, the five (5%) percent
transfer/administrative fee due by Operator in accordance with Article 3 shall
be waived by Franchisor. Any material change in the terms of an offer prior to
closing shall cause it to be deemed a new offer, subject to the same right of
first refusal by Franchisor, or its third-party designee, as in the case of the
initial offer. Franchisor's failure to exercise such option shall not constitute
a waiver of any other provision of this Agreement, including any of the
requirements of this Article with respect to the proposed transfer.
14.2.3 The Operator is not in default under the terms of this Agreement,
the Manuals or any other obligations owed Franchisor, and all of its then-due
monetary obligations to Franchisor have been paid in full.
14.2.4 The Operator and its shareholders or members, if the Operator is a
corporation or limited liability company, have executed a general release under
seal, in a form prescribed by Franchisor, of any and all claims against
Franchisor, its affiliates, subsidiaries, shareholders, directors, officers,
subfranchisors and employees.
14.2.5 The transferee/assignee has demonstrated to Franchisor's
satisfaction that it meets all of Franchisor's then-current requirements for new
operators or for holders of an interest in a franchise, including, without
limitation, possession of good moral character and reputation, satisfactory
credit ratings, acceptable business qualifications, and the ability to fully
comply with the
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terms of this Agreement.
14.2.6 The transferee/assignee has assumed this Agreement by a written
assumption agreement approved by Franchisor, or has agreed to do so at closing,
and at closing executes an assumption agreement approved by Franchisor.
14.2.7 The transferee/assignee, its manager or other employees responsible
for the operation of the System Restaurant have satisfactorily completed
Franchisor's training program.
14.2.8 The transferee/assignee executes such other documents as Franchisor
may require, including a replacement franchise agreement on the then-standard
franchise agreement form used by Franchisor, in order to assume all of the
obligations of this Agreement, to the same extent, and with the same effect, as
previously assumed by the assignor.
14.2.9 At the completion of Operator's sale transaction, Operator shall
pay to Franchisor an administrative/transfer fee of five (5%) percent of the
gross selling price of Operators System Restaurant or in the event of a nonsale
management transfer, a fee of $1,500 to cover Franchisor's training expenses.
This five percent (5%) administrative transfer fee will not be due with respect
to any transfer that (together with all other related previous, simultaneous, or
proposed transfers) does not result in the transfer of control of Operator.
14.2.10 Operator's rights may pass to Operator's next of kin or legatee if
they assume Operator's obligations and attend and complete Franchisor's training
program. Upon Operator's disability, Operator may sell the franchise or keep it,
if operated by trained personnel.
14.2.11 Franchisor's consent to a transfer shall not constitute a waiver
of any claims it may have against the transferring party arising out of this
Agreement or otherwise.
14.2.12 If Operator is an individual, Franchisor hereby consents to the
assignment of this Agreement and any and all obligations referable thereto
without any fee charged by Franchisor to a corporation principally owned by
Operator within 90 days from the date hereof. Upon such assignment and
assumption by the corporation along with delivery of executed originals of same
to Franchisor, an individual Operator shall be released from any and all
personal liability.
ARTICLE 15. TERM, DEFAULT AND TERMINATION.
15.1 TERM.
15.1.1 Provided Operator is not in default of the terms and conditions
contained in its Location sublease and this Agreement, this Agreement shall
continue for a period of twenty (20) years or for any longer period coterminous
with the term of the Location sublease.
15.1.2 Operator may renew the rights granted by this Agreement for four
(4) additional terms of five (5) years each, subject to the following
conditions:
15.1.2.1 Operator gives Franchisor written notice of Operator's election
to renew not less
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than six (6) and not more than twenty-four (24) months before the end of the
then current term;
15.1.2.2 Operator is not in default of any provision of this Agreement or
any amendments to this Agreement, the Location sublease, the Manuals or any
monetary obligation owed to Franchisor or its affiliates; and
15.1.2.3 At Franchisor's request, Operator shall undertake and complete
the reasonable renovation or modernization of its System Restaurant.
15.1.2.4 Operator shall execute Franchisor's then-current franchise
agreement and related agreements.
15.2 DEFAULTS WITHOUT OPPORTUNITY TO CURE.
Operator shall be in default and Franchisor may, at its option, upon thirty (30)
days written notice to Operator, terminate this Agreement and all rights granted
by it, without affording Operator any opportunity to cure the default, upon the
occurrence of any of the following events:
15.2.1 Operator's knowingly or intentionally maintaining false books or
records, or submitting any false report or payment to Franchisor;
15.2.2 Operator's conduct of the System Restaurant licensed pursuant to
this Agreement is so contrary to this Agreement, the System and the Manuals as
to constitute an imminent danger to the public health (for example, selling
spoiled food knowing that the food products are spoiled or allowing a dangerous
condition arising from a lack of security for customers to continue despite
Operator's knowledge of such condition), or selling regularly unauthorized
products to the public after notice of default and continuing to sell such
products whether or not Operator has cured the default after one or more
notices;
15.2.3 The conviction of a felony, or a crime involving moral turpitude,
or any other crime or offense that is reasonably likely, in the sole reasonable
opinion of Franchisor, to adversely affect the System, Franchisor's Marks; the
goodwill associated with the System or Franchisor's interest in each of them by
Operator's, or its controlling or operating shareholders or members if Operator
is a limited liability company, or Operator's partners if Operator is a
partnership, excluding non-managing partners
15.2.4 Operator's intentional disclosure or use of the contents of the
Manual, trade secrets or confidential or proprietary information provided to
Operator by Franchisor in violation of this Agreement, excluding acts of
independent employees or others not under Operator's control; or
15.2.5 If Operator repeatedly commits defaults under any provisions of
this Agreement eight (8) or more occasions in any twelve (12) month period, or
sixteen (16) or more occasions in any consecutive twenty-four (24) month period,
even if Operator cured each such prior default, and even if Operator would
otherwise be given an opportunity to cure the current default.
15.2.6 Operator's, without Franchisor's consent, ceasing to operate or
otherwise
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abandoning its System Restaurant or, upon destruction of its System Restaurant,
failure to rebuild and resume operation within a reasonable time. Cessation of
the business shall not constitute a default under this Agreement if caused by
condemnation, expiration of a Location lease pursuant to its terms at execution,
natural, governmental or supplier related causes out of Operator's control, or
when failure to rebuild following destruction of the System Restaurant is
prohibited by law or the Location lease. In the event of termination pursuant to
this paragraph 15.2.6, the written notice period shall commence five days from
the date Franchisor sends written notice to Operator. At the expiration of this
time period, this Agreement shall be deemed terminated. For purposes of this
article, ceasing to operate or otherwise abandoning its System Restaurant shall
be defined as Operator's failure to open its Pasta Central Restaurant for
business for five consecutive days.
15.3 DEFAULTS WITH OPPORTUNITY TO CURE.
15.3.1 Except as otherwise provided in this Agreement, Operator shall have
ten (10) days after Franchisor's written notice of default within which to
remedy any default under this Agreement, and to provide evidence of such remedy
to Franchisor. If any such default is not cured within that time period, or such
longer time period as applicable law may require, Franchisor may, at its option,
terminate this Agreement and all rights granted by it, by sending a five (5) day
written notice of cancellation of this Agreement to Operator. Upon the
expiration of such five (5) day period, this Agreement shall end and expire as
if it were the day fixed for termination of this Agreement.
15.3.2 Operator shall be in material default under this Article for any
failure to comply with any of the requirements imposed by this Agreement. Such
material defaults shall include, without limitation, the occurrence of any of
the following events:
15.3.2.1 Operator's failure, refusal, or neglect to promptly pay any
monies owed to Franchisor, its subsidiaries or affiliates, when due, or to
submit the financial or other information required by Franchisor under this
Agreement.
15.3.2.2 Operator's failure to maintain the standards specified by
Franchisor in the Manual or otherwise.
15.3.2.3 Operator's failure, refusal or neglect to obtain Franchisor's
prior written approval or consent as required by this Agreement.
15.3.2.4 Operator's misuse or unauthorized use of Franchisor's Marks or
other material impairment of the goodwill associated therewith or Franchisor's
rights therein.
15.3.2.5 Operator's commencement or conducting of any business operation,
or marketing of any product, under a name or mark which, in Franchisor's
reasonable opinion, is confusingly similar to Franchisor's Marks.
15.3.2.6 Operator's default, without cure after the applicable grace
period, under any lease, sublease, sub-sublease, mortgage, or deed of trust
covering the Location.
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15.3.2.7 Operator's failure to procure or maintain the insurance required
by this Agreement or in the lease and sublease for the Location.
15.3.2.8 Operator's default in the performance of any term, condition or
obligation in payment of any indebtedness to its landlord or sublandlord,
distributors or suppliers or others arising out of the purchase of inventory,
supplies or purchase or lease of equipment for operation of its System
Restaurant, and if any such default is not cured within thirty (30) days after
written notice by Franchisor to Operator, unless Operator is determined by a
court of competent jurisdiction to be not in default.
15.4 In the event of a default by Operator, all of Franchisor's costs and
expenses arising from such default, including reasonable legal fees and
reasonable hourly charges of Franchisor's administrative employees shall be paid
to Franchisor by Operator within five (5) days after cure.
15.5 Notwithstanding the obligations of Operator and Franchisor to
arbitrate all disputes and other conflicts, Operator and Franchisor acknowledge
that certain defaults require immediate action to protect the appropriate party.
Accordingly, Franchisor and Operator each hereby consent to and authorize the
other party to apply to any court of competent jurisdiction for judicial
assistance in restraining and enjoining violations of this Agreement. Both
Franchisor or Operator are entitled to an injunction restraining Franchisor or
Operator from committing or continuing to commit any default, breach or
threatened breach of this Agreement, without showing or proving any actual
damage sustained by the party seeking such relief.
15.6 Non-enforcement by Franchisor of any violation of the terms of this
Agreement by Operator shall not constitute a waiver of such violation by
Franchisor nor shall Franchisor be deemed to have waived any of its rights to
enforce compliance by Operator of such breach or any other breach of this
Agreement.
ARTICLE 16. RIGHTS AND OBLIGATIONS UPON TERMINATION.
Upon the termination of Operator's rights granted under this Agreement, (whether
during the term of the Agreement or at its conclusion) the following apply:
16.1 Upon termination of this Agreement by lapse of time or by default,
Operator's right to use Franchisor's Marks, or any other mark distributed by
Franchisor or insignia or slogan used in connection therewith, or any
confusingly similar trademark, service mark, trade name or insignia shall cease.
Operator shall immediately discontinue use of Franchisor's Marks, System, and
color scheme. Operator shall at its own cost, make cosmetic changes to
Operator's System Restaurant from Franchisor's proprietary designs including,
but not limited to, the removal of all Pasta Central identifying materials and
distinctive Pasta Central cosmetic finishes, tile walls, interior wall coverings
and colors, exterior finishes and colors, signage and Pasta Central counter
equipment (which shall be deemed proprietary to Franchisor) from the Location as
Franchisor may reasonably direct.
16.2 Franchisor may retain all fees paid pursuant to this Agreement.
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16.3 Any and all obligations of Franchisor to Operator under this
Agreement shall immediately cease and terminate.
16.4 Any and all rights of Operator under this Agreement shall immediately
cease and terminate.
16.5 In no event shall a termination or expiration of this Agreement
affect Operator's obligations to take or abstain from taking any action in
accordance with this Agreement. The provisions of this Agreement which
constitute post-termination covenants and agreements including the obligation of
Franchisor and Operator to arbitrate any and all disputes shall survive the
termination or expiration of this Agreement.
16.6 Operator acknowledges and agrees that rights in and to Franchisor's
Marks and the use thereof shall be and remain the property of Franchisor.
16.7 If Operator has registered any of Franchisor's Marks or the name
Pasta Central as part of Operator's assumed, fictitious or corporate name,
Operator shall promptly amend such registration to delete Franchisor's Marks
therefrom.
16.8 Operator shall immediately pay any and all amounts owing to
Franchisor, its subsidiaries and affiliates.
16.9 Franchisor shall have the option, exercisable by written notice
within thirty (30) days after the termination of this Agreement, to take an
assignment of all telephone numbers (and associated listings) for Operator's
System Restaurant. Operator is not entitled to any compensation from Franchisor
if Franchisor exercises this option.
ARTICLE 17. INSURANCE.
17.1 Operator shall obtain and maintain insurance coverage which shall in
each instance designate Franchisor, and its subsidiaries, as an additional named
insured, with an insurance company approved by Franchisor, which approval shall
not be unreasonably withheld as follows:
17.1.1 Comprehensive general liability insurance (including products
liability and sexual harassment coverage); with coverage of $1,000,000 to
$3,000,000 combined single limit for death, personal injury, and $100,000
property damage coverage.
17.1.2 Business interruption insurance, including Location rentals and
Additional Rentals for twelve (12) months after casualty, in amounts equal to at
least $100,000.
17.1.3 Workers' compensation insurance (coverage B) as required by
applicable law.
17.1.4 Fire, windstorm and extended coverage insurance, insuring the
construction of improvements and completed System Restaurant operated by
Operator, for the full replacement value thereof.
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17.1.5 If Operator establishes a delivery service for Authorized Products,
Operator shall obtain separate non-owned auto coverage insurance. Operator may
not directly or indirectly deliver any Authorized Products until such insurance
is obtained and Franchisor named as additional insured therein.
17.2 In the event of damage to the System Restaurant covered by insurance,
the proceeds of any such insurance shall be used to restore the System
Restaurant to its original condition as soon as possible, unless such
restoration is prohibited by the Location lease or Franchisor has otherwise
consented to in writing. Upon obtaining such insurance, Operator shall promptly
provide to Franchisor proof of such insurance coverage and/or at such other
times upon the request of Franchisor.
17.3 Operator shall, prior to opening its System Restaurant, file with
Franchisor, certificates of such insurance and shall promptly pay all premiums
on the policies as they become due. In addition, the policies shall contain a
provision requiring thirty (30) days prior written notice to Franchisor of any
proposed cancellation, modification, or termination of insurance. If Operator
fails to obtain and maintain the required insurance, Franchisor may, at its
option, in addition to any other rights it may have, procure such insurance for
Operator without notice and Operator shall pay, upon demand, the premiums and
Franchisor's costs in taking such action.
ARTICLE 18. SOLE OBLIGATIONS OF FRANCHISOR.
18.1 As described in Franchisor's Uniform Franchise Offering Circular (the
"UFOC"), received by Operator at least ten (10) business days prior to the
execution of this Agreement, Franchisor has obligated itself to provide specific
services to Operator. Franchisor also provides other voluntary services at its
sole discretion. Franchisor and Operator agree that the following are the only
required obligations of Franchisor:
18.1.1 To approve the Location of Operator.
18.1.2 To reasonably assist Operator with any operational or financial
problem encountered by Operator, after notice to Franchisor in duplicate sent
to: (i) Franchisor c/o General Counsel, 740 Broadway - 12th Floor, New York, New
York 10003; and (ii) Vice President - Operations, 1775 The Exchange, Suite 600,
Atlanta, Georgia 30339 by certified mail (return receipt requested) or at any
subsequent addresses established by Franchisor, of Operator's problem and the
type of assistance needed. At no time shall reasonable assistance be interpreted
to require Franchisor to pay any money to Operator. Franchisor, in its sole
discretion, may provide any assistance at Franchisor's designated office or upon
Franchisor's election where Operator is located, at a time to be determined by
Franchisor.
18.1.3 To reasonably administer to the advertising program. Operator
acknowledges that pursuant to the advice of advertising and marketing
professionals, advertising collections will at times be aggregated until
sufficient revenues are accumulated to commence or complete an advertising or
marketing program. Reasonable administration shall be deemed to be good faith
attempts to utilize the advertising funds in accordance with the advice and
suggestions of the advertising and marketing staff or outside advertising and/or
marketing companies, consultants or
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other entities retained for such purpose.
18.1.4 To assist Operator in arranging for the initial financing of its
System Restaurant, if feasible and necessary (Franchisor is not directly or
indirectly responsible for the failure of Operator to meet the qualifying
standards of such independent financing sources).
18.1.5 To supply to Operator a set of standard decor and layout plans and
to thereafter approve the initial decor and layout of Operator's System
Restaurant.
18.1.6 To loan Operator a copy of its Operations Manual or computer
diskette thereof, which manual contains mandatory and suggested specifications,
standards and procedures. This Manual is confidential and remains Franchisor's
property.
18.1.7 To train Operator in accordance with Article 3 herein, and to
provide representatives of Franchisor to assist in opening the System
Restaurant.
18.2 Franchisor shall not, and can not be held in breach of this Agreement
until (i) Franchisor has received notice of any alleged breach from Operator in
duplicate, by registered mail, sent to the parties set forth in subparagraph
18.1.2 of this Article; and (ii) Franchisor has failed to remedy the breach
within a reasonable period of time after such notice, which period shall not be
less than sixty (60) days. This is a material term of this Agreement and may not
be modified or changed by any arbitrator in an arbitration proceeding or
otherwise in any court of competent jurisdiction.
ARTICLE 19. POINT OF SALE SYSTEM, COLLECTION OF DATA.
19.1 This Agreement and the Manuals require the submission of weekly
statistical control forms as well as other financial, operational and
statistical information required by Operator and Franchisor to: (i) assist
Operator in the operation of its System Restaurant in accordance with the
System; (ii) allow Franchisor to monitor the Operator's gross sales, purchases,
costs and expenses; (iii) enable Franchisor to develop chainwide statistics
which may improve bulk purchasing; (iv) assist Franchisor in the development of
new authorized products or the removal of existing unsuccessful Authorized
Products; (v) enable Franchisor to refine existing Authorized Products; (vi)
generally improve chainwide understanding of the System; and (vii) obtain new
types of information unknown at this time (collectively, the "Information"). To
achieve these results, cash collection and data processing systems are
necessary.
19.2 Operator agrees to purchase and use the point of sale cash collection
and data processing system (the "POS System") and only the specified software
authorized by Franchisor, as specified in the Construction and Equipment Manual
or otherwise by Franchisor in writing. The POS System includes a PC based cash
register with touch screen keyboard, register tape printer, magnetic strip
reader, electronic cash drawer, defined Franchisor polling and register software
and telecommunications equipment.
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19.3 Operator agrees to (i) connect the POS System to Operator's telephone
line(s); (ii) maintain it in good working order; and (iii) not disconnect any
POS System connection or phone line at any time, for any reason, without prior
written approval. Operator agrees, at Franchisor's request, to maintain
membership in a designated third party network (such as Compuserve, AOL,
Prodigy, etc.) for the purpose of implementing, transmitting, collecting and
maintaining any Information or data exchange system.
Operator specifically authorizes Franchisor to either "upload" or
"download" information in and from or to its computers, cash registers or other
such devices as allowed by law, as it relates to the System Operation by
internet, intranet and other networks and other means as they become available.
19.4 Operator agrees to pay to Franchisor up to $13 weekly (subject to
reasonable annual increases), in the manner provided under Article 9 herein, for
support service for the POS System software during the term of its franchise and
any renewals. This fee will be collected by Franchisor for payment to 3rd party
suppliers who are designated to provide the support service. The 3rd party
suppliers will provide 24-hour telephone support and annual maintenance for any
upgrades and enhancements that they make to the required POS System software.
Franchisor may cancel this service on 30 days' written notice to Operator, and
may resume this service at any time with any supplier Franchisor chooses.
Franchisor may revise the POS System specifications. Operator may be required to
upgrade or update its POS System. On Franchisor's request, Operator must apply
for and maintain debit card, credit card or other non-cash payment systems to
enable customers to purchase products through these procedures. There is no
contractual limitation on Franchisor's right to receive information through the
POS System.
ARTICLE 20. RELATIONSHIP OF PARTIES, DISCLOSURE.
20.1 Franchisor and Operator are not and shall not be considered joint
ventures, partners, or agents of each other, or anything other than Franchisor
and Operator, and neither shall have the power to bind or obligate the other
except specifically as set forth in this Agreement. Franchisor and Operator
agree that the relationship created by this Agreement is not a fiduciary
relationship. Operator shall not, under any circumstances, act or hold itself
out as an agent or representative of Franchisor. Operator agrees to indemnify
and hold Franchisor harmless from any claims, demands, liabilities, actions
suits or proceedings asserted by third parties arising out of the operation of
Operator's System Restaurant or Operator's breach of any of the terms of this
Agreement. Franchisor agrees to indemnify and hold Operator harmless from any
claims, demands, liabilities, actions suits or proceedings asserted by third
parties and arising out of Franchisor's operations unless caused by Operator.
20.2 As set forth in the UFOC delivered to Operator as described above,
Operator acknowledges that Franchisor has entered into certain subfranchise
agreements with subfranchisors and/or area developers in certain areas and
territories. Pursuant to these contracts, the subfranchisors of Franchisor are
obligated to provide certain sales, operational and support services for
Franchisor. Operator acknowledges that the relationship between Franchisor and
all of its subfranchisors and/or
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area developers is strictly contractual and that no subfranchisor and/or area
developer is an agent of Franchisor. Accordingly, Operator acknowledges and
agrees that any past, current or future subfranchisor is not the actual, express
or implied agent of Franchisor, and has no power or authority to: (i) act on
Franchisor's behalf; (ii) enter into or execute any agreement on Franchisor's
behalf; (iii) make any representation or promise on Franchisor's behalf; or (iv)
bind Franchisor in any way. Unless otherwise specifically agreed to in writing,
Franchisor expressly disavows any acts by others, including subfranchisors, that
purport to bind Franchisor in any way. Operator agrees to waive any claim or
defense in any litigation or arbitration proceeding that a subfranchisor is the
express or implied agent of Franchisor. Operator agrees that any attempt to
raise, assert or justify such claim or defense in any proceeding constitutes a
material default of this Agreement.
ARTICLE 21. DISPUTE RESOLUTION:
ARBITRATION AND LEGAL PROCEEDINGS.
21.1 Franchisor and Operator acknowledge that disputes or disagreements
may arise during the term of this Agreement and any renewals thereto. Franchisor
and Operator have elected to resolve such disputes or disagreements in a
non-judicial alternative dispute resolution format ("ADR"). An ADR format
minimizes the expense of dispute resolution and generally can be accomplished in
a more expeditious and effective manner. By agreeing to an ADR format, both
Operator and Franchisor are also waiving a number of rights, remedies and
privileges which may arise in a judicial resolution format. In view, however, of
the continuing relationship between Operator and Franchisor over the original
and renewal terms of this Agreement, both Operator and Franchisor agree that an
ADR format is the most economical, efficient and practical way to resolve
disputes and disagreements.
21.2 Accordingly, except as otherwise provided in this Agreement, in the
event of any dispute or disagreement between Franchisor and Operator with
respect to any issue arising out of or relating to this Agreement, its breach,
its interpretation or any other disagreement between Operator and Franchisor,
such dispute or disagreement shall be resolved by arbitration. In the event of
any dispute or disagreement, Operator and Franchisor both agree to submit the
dispute to arbitration in accordance with the least expensive procedure of the
American Arbitration Association ("AAA"), and the application for such
arbitration shall be filed in the AAA's New York City office. Franchisor and
Operator agree that the hearing(s) shall be held in the City of New York, State
of New York before one Arbitrator. This paragraph shall not apply to any
monetary defaults of Operator, including Operator's obligation to pay franchise
and advertising fees to Franchisor, and Franchisor shall be free to utilize any
right or remedy it may have at law or equity.
21.3 Franchisor and Operator agree that this Agreement evidences a
transaction involving interstate commerce and that the enforcement of this
arbitration provision and the confirmation of any award issued to either party
by reason of an arbitration conducted pursuant to this arbitration provision is
governed by the Federal Arbitration Act, 9 U.S.C. ss. 1 et seq.
21.4 Punitive or exemplary damages or attorney's fees may not be awarded
by the arbitrator(s), and any such award shall not be enforceable or enforced by
any court. Except as otherwise provided, each party shall bear its own
attorneys' fees, expert witness fees, and other court or arbitration costs
incurred in connection with any legal action or arbitration between
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Franchisor and Operator. If the waiver of punitive or exemplary damages or legal
fees and related costs are in violation of the laws of the state where the
Operator's System Restaurant is located, such claims may be awarded by the
arbitrator(s), and any such award shall be enforceable or enforced in any court
of appropriate jurisdiction. This Agreement shall be strictly construed in the
arbitration hearing. In no event can the material provisions of this Agreement
including, but not limited to the method of operation, Authorized Product line
or monetary obligations specified in this Agreement, amendments to this
Agreement or in the Manuals be modified or changed by the arbitrator at the
arbitration hearing.
21.5 Except for a proceeding for injunctive relief (including temporary
restraining orders, preliminary injunction, injunctions or similar relief which
must be brought in an appropriate local forum), any legal proceeding authorized
by this Agreement shall be commenced only in the Federal District Court for the
Southern District of New York, and both Franchisor and Operator consent to the
jurisdiction in the Federal District Court for the Southern District of New
York. In the event the parties do not meet the jurisdictional requirements for
Federal Court, the parties consent to jurisdiction in the Supreme Court, New
York County, State of New York. Operator agrees that mailing to its last known
address by certified mail of any process shall constitute lawful and valid
process. In all cases, Operator and Franchisor each waives any right to a trial
by jury. Notwithstanding the foregoing, if the laws of the state where
Operator's System Restaurant is located require jurisdiction of the courts of
that state or control by the laws of that state, then this Agreement shall be
deemed modified to comply with the applicable laws.
21.6 The terms of this article shall survive termination, expiration or
cancellation of this Agreement.
ARTICLE 22. EXECUTION, REQUESTS, CONSENTS AND WAIVERS.
22.1 This Agreement takes effect upon its acceptance and execution by
Operator and Franchisor, and shall be governed by and construed in accordance
with the laws of the State of New York, USA. Franchisor will consider written
requests by Operator for Franchisor's consent to a waiver of any obligation
imposed by this Agreement. Operator agrees, however, that Franchisor is not
required to act uniformly with respect to waivers, requests and consents as each
request will be considered on a case by case basis, and nothing shall be
construed to require Franchisor to grant any such request. Any waiver granted by
Franchisor shall be without prejudice to any other rights Franchisor may have,
will be subject to continuing review by Franchisor, and may be revoked, in
Franchisor's sole discretion, at any time and for any reason, effective upon ten
(10) days prior written notice to Operator. Franchisor makes no warranties or
guarantees upon which Operator may rely, and assumes no liability or obligation
to Operator by providing any waiver, approval, consent, assistance, or
suggestion to Operator in connection with this Agreement, or by reason of any
neglect, delay, or denial of any request.
22.2 Unless otherwise provided, whenever this Agreement requires Operator
to obtain Franchisor's prior written consent, Operator shall timely address its
written request for such consent in duplicate to the parties set forth in
paragraph 2 of Article 18 or such other persons as Franchisor may designate in
writing. Franchisor will then consider such request and advise Operator of the
decision, in writing, within forty-five (45) days. Franchisor's failure to
advise Operator will
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constitute Franchisor's consent to such request. The forty-five (45) day period
shall not begin to run, however, until Operator has provided Franchisor with all
information and documentation requested by Franchisor. Neither Operator nor
Franchisor shall be deemed to have waived or impaired any right, power or option
reserved by this Agreement, including, without limitation, its right to demand
strict compliance with every term, condition, and covenant herein, or to declare
any breach thereof a default and to terminate this Agreement prior to the
expiration of its term, by virtue of any custom or practice of the parties at
variance with the terms hereof; by any forbearance, delay, failure, or omission
to exercise any right, power, or option, whether of the same, similar, or
different nature, against Franchisor, Operator, or any other operator; or by the
acceptance of any payments due after any breach of this Agreement.
ARTICLE 23. MISCELLANEOUS PROVISIONS.
23.1 This Agreement may be executed in any number of counterparts, each of
which, when so executed and delivered, shall be deemed an original, but such
counterparts together shall constitute but one and the same instrument.
23.2 This Agreement contains the entire agreement of the parties and
cannot be modified, changed or amended except in writing and signed by
Franchisor.
23.3 There is no other agreement, representation or warranty made by
Franchisor or any other entity or person associated with Franchisor other than
contained in this Agreement. This Agreement is not subject to or conditioned
upon the obtaining of a Location for Operator's System Restaurant.
23.4 Except as otherwise provided, each party shall bear its own
attorneys' fees arising from the negotiations and execution or lack of execution
of this Agreement.
23.5 Each article, paragraph, subparagraph, term, and condition of this
Agreement shall be considered severable. If for any reason, any portion of this
Agreement is determined to be invalid or in conflict with any law or rule in a
final ruling issued by any court, agency, or tribunal with valid jurisdiction in
a proceeding to which Franchisor is a party, that ruling shall not effect the
validity or enforceability of any other portion of this Agreement.
23.6 All notices to Franchisor required by the terms of this Agreement,
unless otherwise provided, shall be sent by certified or registered mail or by
overnight delivery service, addressed to the parties set forth in this
Agreement, or at such other address as Franchisor designates. All notices to
Operator required by the terms of this Agreement shall be sent by certified or
registered mail or by overnight delivery service, addressed to Operator at the
Location, or at such other or additional address as Operator designates in
writing. If Operator refuses acceptance of any certified, registered or
overnight delivery, acceptance shall be deemed to have occurred forty-eight (48)
hours after rejection of such notice.
23.7 Operator acknowledges that the evolution of the System requires the
development of Nontraditional Pasta Central Restaurants, and Pasta Central
Distribution Points and Branded Products.
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23.8 For the purpose of this article, a co-brand shall be defined as an
independent operating system owned by another entity (not Franchisor) that is
incorporated as an operational part within the Operator's System Restaurant. An
example would be an independent ice cream/yogurt operation installed within
Operator's System Restaurant. Subject to Franchisor's prior written approval,
Operator may install approved co-branding marketing systems to be operated in
conjunction with Operator's System Restaurant. Franchisor shall not be required
to approve any co-branding marketing system unless Franchisor has recognized
that co-branding system as an approved co-brand for operation within its system
restaurants, either nationally or regionally. Inasmuch as Operator and its
employees will be incorporating the co-brand within its System Restaurant, all
sales of the co-brand shall be included within the definition of "gross sales"
in Article 9 herein and Operator shall pay to Franchisor franchise and
advertising fees for such sales.
IN WITNESS WHEREOF, the parties hereof have executed this Agreement as of
the date of execution by Franchisor.
PASTA CENTRAL CO., an unincorporated
division of Blimpie International, Inc.
__________________________ By:_______________________________________
Date Signed Vice President
Corporation
___________________________ By:_______________________________________
Date Signed Name, President
By execution of this Agreement, the undersigned stockholder(s) of the corporate
Operator, or members of the LLC, or the individual Operator hereby personally
accepts and agrees to comply with Article 10 of this Agreement and acknowledges
that the Franchisor has executed this Agreement in reliance upon the commitments
contained in this Paragraph.
__________________________________________
Name
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Exhibit 10.48
SUBFRANCHISE AGREEMENT
AGREEMENT, made as of the _____ day _________, _____ by and between Pasta
Central Co., an unincorporated division of Blimpie International, Inc., a New
Jersey corporation, located at 740 Broadway, 12th Floor, New York, New York
10003 (hereinafter the "Franchisor") and Subfranchise Corp Name located at
Address (hereinafter referred to as the "Subfranchisor").
W I T N E S S E T H:
WHEREAS, Franchisor, its subsidiaries and its affiliates have acquired,
developed and innovated unique methods of merchandising, promotion, production,
quality control and distribution of Italian-type food products and clothing for
the franchised operation of Pasta Central Restaurants under the trademark and
trade name of "Pasta Central" (the "Trademarks") as described in Franchisor's
1999 Mulistate Pasta Central Subfranchise Uniform Franchise Offering Circular
("Subfranchise UFOC") which has been previously received by Subfranchisor; and
WHEREAS, Subfranchisor acknowledges receipt on Insert Date (the
"Disclosure Date") of the Subfranchise UFOC and Franchise UFOC; and
WHEREAS, Franchisor is authorized to issue Pasta Central subfranchise
agreements and Pasta Central Restaurant franchise agreements in the State of
State including the Counties of Counties (approximate population xxxx); and
WHEREAS, Franchisor awards Pasta Central Restaurant franchise agreements
for traditional and nontraditional Pasta Central Restaurants. Nontraditional
Pasta Central Restaurants shall be deemed to be Pasta Central Restaurants
installed within another primary business such as colleges, universities,
convenience stores, supermarkets, hospitals, department stores, etc. Traditional
Pasta Central Restaurants are generally developed via the execution of a lease
for the Pasta Central Restaurant premises by a subsidiary leasing corporation of
the Franchisor which is subleased to the approved Pasta Central Restaurant
franchisee. Nontraditional Pasta Central Restaurants are developed by the
execution of a standard Pasta Central Restaurant nontraditional franchise
agreement without the execution of a lease for the Pasta Central Restaurant
premises, except in certain circumstances when a lease is obtained; and
WHEREAS, pursuant to this agreement and as described in the UFOC,
Subfranchisor is obligated to provide to Pasta Central Restaurants support
services on behalf of Franchisor including, but not limited to, assistance in
the nature of consultation, advice and guidance regarding location selection,
lease negotiations, construction coordination, "Grand Openings", store training,
marketing advice and implementation, promotions, point of sale purchases or any
other administrative tasks designated by Franchisor as support programs that
need to be implemented for proper management of the Territory (collectively the
"Support Services"); and
WHEREAS, it is the desire of Subfranchisor to become a regional support
entity to provide the Support Services in the Territory required by Franchisor
in order to receive a portion
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of the initial and continuing franchise fees received from each franchisee in
the Territory as hereinafter described and in the UFOC; and
WHEREAS, Franchisor is willing to sell and grant to Subfranchisor, a
subfranchise agreement, under the terms and conditions set forth herein for the
Counties of Counties, State of State (hereinafter the "Territory"); and
WHEREAS, after consultation with independent counsel and a diligent
investigation of all available information, Subfranchisor is willing to purchase
and receive a grant by Franchisor of a subfranchise agreement, under the terms
and conditions set forth herein for the Territory.
NOW, THEREFORE, in consideration of the mutual promises and covenants, it
is mutually agreed as follows:
1. CONSIDERATION:
In consideration of Franchisor's execution of this agreement,
Subfranchisor agrees to pay to Franchisor the non-refundable sum of $FEE (the
"Subfranchise Fee") on the date first above written.
2. GRANT OF EXCLUSIVE SUBFRANCHISE RIGHTS; TERRITORY; TERM:
2.1 The area subject to this agreement shall be the Territory defined
above.
2.2 The term of this agreement shall commence simultaneously with the
execution of this agreement by all relevant parties. The term of this agreement
shall continue for a term of 50 years (the "Term") unless terminated as provided
for herein.
2.3 Subject to compliance with the obligations of Subfranchisor as
contained herein and in the UFOC, Franchisor hereby grants and conveys to
Subfranchisor the exclusive right to be a Subfranchisor of Franchisor in the
Territory in connection with the sale of Pasta Central franchises or branded
products in the Territory or with respect to subfranchise rights to receive
Subfranchisor's portion of the receipts obtained from Pasta Central franchisees
and branded product sales for the sale of authorized products under the
trademark of "Pasta Central" and such other associated names, tag lines and
slogans as Franchisor may own or use as described herein and in the UFOC.
Notwithstanding the expiration of the Term, whether by termination, expiration
or otherwise, Subfranchisor shall retain all rights to receive continuing
franchise fees from Pasta Central Restaurants developed prior to the termination
or expiration of the Term, including any and all franchise agreement renewals or
the relocation of Pasta Central Restaurants arising from the expiration of their
respective leases (but not for branded products). Nothing contained in this
paragraph shall be deemed to limit or modify the right of Franchisor (i) to
terminate this agreement for any of the defaults set forth herein subject to any
and all applicable notice and cure rights granted to Subfranchisor; (ii) to
issue Pasta Central franchise agreements to Pasta Central franchisees in the
Territory; or (iii) to require the leasing corporations to execute master leases
and thereafter grant subleases to franchisees in the Territory. Franchisor
agrees that so long as this agreement is in full force and effect, Franchisor
shall not directly or indirectly
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issue another Pasta Central subfranchise in the Territory or issue a grant to a
third party of any part of Subfranchisor's rights thereof.
3. OBLIGATIONS OF THE FRANCHISOR:
Franchisor promises and covenants as follows:
3.1 To permit Subfranchisor to use the Trademarks, its logotypes and any
other trademarks or service marks which Franchisor may authorize and designate
for use by Subfranchisor, including tag lines and slogans. Subfranchisor upon
Franchisor's request agrees to use the newest trademarks developed by Franchisor
upon the minimum of at least 30 days prior written notice to Subfranchisor;
3.2 To furnish by lending Subfranchisor a copy of the Pasta Central
Subfranchise, Operations, Local Restaurant Marketing and Construction Manuals
(hereinafter collectively the "Manual(s)"), together with any subsequent changes
or amendments thereto. Subfranchisor agrees not to copy, publish or duplicate
the contents of said Manual except when needed to supply each Pasta Central
franchisee or for dissemination to the officers and key employees of
Subfranchisor;
3.3 To supply Subfranchisor, free of charge, one complete sample set of
all sales materials and forms, including the standard franchise agreement and
applicable UFOC to be delivered to each prospective franchisee at the first
meeting or 10 business days (excluding holidays and weekends) prior to the
execution of a franchise agreement and to be used by Subfranchisor in connection
with the sale of each individual franchise unit. UFOCs, brochures and sales
materials are generally purchased from printers hired for such purposes;
3.4 To make available to Subfranchisor the right to consult in person at
the office of Franchisor or by telephone with Franchisor's officials and staff
in its New York office or at such other location designated by Franchisor about
problems relating to design, construction and operation of franchise units at
the office of Franchisor so that Subfranchisor will have available to it the
experience and expertise of Franchisor. Currently, Franchisor has
executive/legal department offices in New York, New York, accounting, operations
and sales offices in Atlanta, Georgia and construction and equipment offices in
Houston, Texas. Additional or replacement offices may be developed in the future
and the advice and consultation will be provided from the respective offices of
Franchisor;
3.5 To provide a training program for 10 days (72 hours) (or such lesser
or greater periods as established by Franchisor) of classroom instruction and
for 120 hours of on-the-job training in an existing Pasta Central Restaurant in
Atlanta, Georgia or, in Franchisor's sole discretion, in another area. The
training program covers the operational and statistical methods of operating a
Pasta Central Restaurant and Pasta Central subfranchise business, franchise
sales, real estate procurement and marketing. Training shall be attended by the
controlling stockholders of Subfranchisor if a corporation, all partners if a
partnership, all individual proprietors if a sole proprietorship, and all
managing executives and operational supervisors, in Atlanta, Georgia. If the
ownership, management or operational supervisor is changed, the new management
or
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executive(s) must also be trained prior to the commencement of their
responsibilities. Payment of all expenses of training, except for salaries of
Franchisor's staff and operating expenses of Franchisor, are the obligation of
Subfranchisor. All travel, lodging, entertainment and other expenses are solely
that of Subfranchisor. Franchisor shall be responsible for all costs of actual
training including training staff, training facility and the cost of store
operational training;
3.6 As changes in applicable laws occur, to attempt to inform
Subfranchisor of any applicable federal or state franchise laws. Subfranchisor
acknowledges that such information is generally provided at the semi-annual
subfranchisor meetings sponsored by Franchisor and at the annual convention of
Franchisor. This provision shall in no way release Subfranchisor from its
obligation to comply with all applicable laws;
3.7 To pay all bills, invoices, fees and other obligations that may be
owed to Subfranchisor by Franchisor, provided Subfranchisor is in full
compliance with this agreement;
3.8 To coordinate a franchise sales program by providing trained
salesperson(s), satisfactory to Franchisor, to process and sell franchises to
franchisee prospects interested in locating in the Territory obtained by
Subfranchisor or Franchisor. There are no representations, warranties,
commitments or assurances of success by said salesperson(s) and Subfranchisor
agrees to make no claims whatsoever with respect to the success or failure of
Franchisor's salesperson(s) during the Term;
3.9 To protect and defend Subfranchisor's right to use, and the validity
of, Franchisor's trademarks; and
3.10 To direct duplicates of sales leads to Subfranchisor so that
Subfranchisor can work with Franchisor's salesmen or process sales if
Franchisor's salesmen are not involved.
4. FRANCHISOR'S REPRESENTATIONS, ETC.:
Franchisor warrants and represents as follows:
4.1 That Franchisor has the right, title and interest to grant the within
agreement and that all rights granted herein to Subfranchisor are free and clear
of any and all liens, claims or encumbrances;
4.2 That Franchisor has the full power and authority to enter into this
agreement and that the within agreement and the obligations of Franchisor
hereunder does not conflict with nor result in a breach of any agreement to
which Franchisor is a party of or by which Franchisor is otherwise bound; and
4.3 That Franchisor will protect and defend the rights of Subfranchisor
against third parties claiming a violation of Articles 4.1 and 4.2 and the
validity of the Trademarks at its sole expense.
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5. OBLIGATIONS OF THE SUBFRANCHISOR:
Subfranchisor promises and covenants as follows:
5.1 To devote its best efforts to develop and manage the Territory,
including the provision of sales assistance to Franchisor's salesmen, opening
and servicing of all Pasta Central Restaurants and distribution points in the
Territory, in accordance with the requirements of Franchisor which (except for
the development requirements in Article 8) may change and vary. To advertise on
a regular basis for franchise prospects in the Territory and to seek to obtain
sales prospects by networking and franchise sales promotional activities, to
promptly provide to Franchisor all pertinent information about responses to such
advertising or networking/promotions, and to thereafter assist Franchisor's
sales staff in processing and selling each respective franchise;
5.2 To abide by and strictly comply with the terms, rules and requirements
set forth in the UFOC, Manuals and this agreement;
5.3 To make no unauthorized promises, representations or commitments in
connection with the sale of franchises other than as furnished or authorized in
writing by Franchisor. To attend all regional and national meetings and the
annual Pasta Central conventions when instituted;
5.4 In accordance with the schedules established by Franchisor with
respect to policing and operational/marketing support, to regularly inspect all
franchise units within the Territory for quality operations, appearance and
cleanliness and, to use best efforts to assure that franchisees in the Territory
use only Franchisor-approved and authorized foods, supplies, equipment,
furnishings and fixtures. Construction and equipment specifications are set
forth in the Construction Manual and authorized raw materials are set forth in
the Operations Manual as revised from time to time;
5.5 To provide each franchisee within the Territory with competent and
timely Support Services; which shall be defined as assistance in the nature of
consultation, advice and guidance regarding location selection, lease
negotiations, construction coordination, "Grand Openings", store training,
marketing advice and implementation, promotions, point of sale purchases or any
other administrative tasks designated by Franchisor as support programs that
need to be implemented for proper management of the Territory;
5.6 To provide reasonable assistance to Franchisor with regard to the
enforcement of franchise agreements within the Territory, as well as the rules
and obligations of the Manual and the general operating policies of Franchisor.
[In clarification of this paragraph, Subfranchisor is not required to commence
or initiate legal proceedings to enforce any of the above referenced agreements,
manuals or policies. Franchisor and Subfranchisor shall each reasonably
cooperate with each other, and provide testimony as needed for any arbitration
or legal proceeding. Franchisor's decision shall control with respect to
decisions regarding when to commence or settle a claim or as to strategy in
defending arbitrations/legal actions and choice of counsel.] To the extent
possible, each franchise agreement shall contain an arbitration clause requiring
all
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disputes to be settled by arbitration. With respect to offensive or defensive
franchisee arbitrations/legal proceedings, including encroachment or franchisee
territorial disputes in the Territory against Franchisor or any leasing company,
all costs and expenses of all actions shall be borne equally by Franchisor and
Subfranchisor, since each jointly shares in the collections of franchise fees
from the Territory. An offensive legal proceeding is an action or arbitration
commenced to enforce each respective Pasta Central Restaurant franchise
agreement or sublease. Generally, continuing franchise fees are collected via an
initial eviction action which sometimes requires subsequent or simultaneous
arbitration actions. Prior to the commencement of any arbitration or legal
proceeding, Subfranchisor shall be afforded prior notice and an opportunity to
negotiate with the respective franchisee to amicably resolve the dispute. A
defensive legal proceeding is an action or arbitration commenced by a Pasta
Central Restaurant franchisee, landlord or third party in the Territory against
the Franchisor;
5.7 To protect the integrity of the Trademarks and to maintain the highest
standards of integrity, quality and reputation;
5.8 To pay all bills, invoices, fees and other obligations that may be
owed to Franchisor by Subfranchisor;
5.9 To not engage in any unauthorized advertising, as such is defined in
the Manual or any other advertising that is not previously approved by
Franchisor, which approval shall not be unreasonably withheld or delayed;
5.10 To comply with Article 8 of this agreement entitled "Area Franchise
Development";
5.11 To promptly notify Franchisor if it is in violation of any of the
terms of this agreement and to grant to Franchisor a 45-day period in which to
cure any such defaults after notice thereof by registered mail in accordance
with Article 14 herein. Any claims of default not noticed within 6 months of
default shall be deemed waived by Subfranchisor. Franchisor shall not be deemed
to be in default of this agreement unless and until such notice is sent to
Franchisor and such other parties set forth in Article 14 and the aforesaid cure
period has expired without said default having been cured;
5.12 To comply with any Pasta Central Restaurant Franchise Agreement
executed by Subfranchisor or by any corporation controlled by Subfranchisor that
has purchased a Pasta Central franchise;
5.13 To promptly attend to all sales leads and other inquiries from
prospective franchisees and to work cooperatively in the sales process with
salesmen of Franchisor;
5.14 If a dispute or disagreement arises with Franchisor, to submit such
dispute or disagreement to a single arbitrator in accordance with Article 20
herein;
5.15 To exercise its best efforts to protect the integrity of the
Trademarks and other proprietary rights, and to maintain the highest standards
of morality, ethics and reputation;
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5.16 To feature the Trademarks and logotypes in all of its local
advertising, promotions, signs, literature and operations, and to clearly
indicate to all third parties that Subfranchisor is not an employee, agent or
fiduciary of Franchisor; and
5.17 On occasion, pre-sold individuals and other entities may indicate a
willingness to purchase Pasta Central Restaurant franchise agreements without
any sales activities required. These generally arise from existing Pasta Central
Restaurant franchisees or their employees in other territories or friends and
associates of Pasta Central Restaurant franchisees, subfranchisors and employees
of Franchisor. With respect to the sales commissions owed for such sales, said
commissions may be payable to third parties involved in the sale.
5.18.1 Subfranchisor must, at Subfranchisor's expense, purchase and use a
personal computer system for its subfranchise business that is compatible with
Franchisor's computer equipment. Subfranchisor must obtain, use and maintain, at
Subfranchisor's expense, an Internet service connection that enables
Subfranchisor to receive e-mail, use internet services, and send and receive
other electronic information to and from Franchisor.
5.18.2 Franchisor may add to, remove substitute or modify computer
requirements in its discretion. Franchisor will provide Subfranchisor with
standards and specifications for required computer products, instructions for
use, and updates of the same. Franchisor may require Subfranchisor to maintain
maintenance and/or service contracts at Subfranchisor's expense. Subfranchisor
may obtain approved computer products from any suppliers it chooses.
5.18.3 Franchisor may negotiate supply contracts for hardware and software
in its discretion. Franchisor will not guarantee, warranty, maintain or support
any computer hardware or software.
6. ADVERTISING:
6.1 Except as provided herein, and in Articles 5 and 22, neither
Franchisor nor Subfranchisor is under any duty or obligation to engage in any
consumer advertising or promotion for Pasta Central Restaurants in the
Territory.
6.2 A sum equal to 4% of the gross weekly sales of each Pasta Central
Restaurant franchisee (as provided in the standard Franchise Agreement), is to
be paid by such franchisee and deposited into an advertising account. Such funds
are to be only used for advertising uses as set forth in the respective
franchise agreements under the sole control of Franchisor.
6.3 Franchisor's policy with respect to advertising is to encourage the
franchisees in the Territory to form and implement an advertising cooperative
and to participate in advertising and marketing decisions in conjunction with
the assistance of Subfranchisor and the authorization, approval or direction of
Franchisor. Subfranchisor shall coordinate the formation of the cooperative,
attend all meetings and provide all assistance and guidance to the Pasta Central
Restaurant franchisees as requested by Franchisor in order to work cooperatively
with said franchisees. If multiple territories are part of the cooperative, then
in such event
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Subfranchisor shall work harmoniously and constructively with other
subfranchisors and franchisees as may be needed.
6.4 Subfranchisor shall be required to provide $2,000, to be matched by
the franchisee's grand opening contribution, for each of the first 3 franchised
Pasta Central Restaurants opened in the Territory. This will enable the
Territory to be opened correctly with appropriate promotional and marketing
activities for these initial franchises. Subfranchisor must also spend
approximately $8,000-$12,000 each year to advertise for franchisees in its
Territory, and must join local civic clubs and similar organizations to promote
the growth of its subfranchise business.
7. FRANCHISE FEES:
7.1 The Initial Franchise Fee for a traditional Pasta Central Restaurant
within the Territory shall be determined by Franchisor, in its sole discretion,
on a deal by deal basis, but generally on an annual basis. For the years 1999
and 2000, the Initial Franchise Fee for the first Traditional franchise sold to
a franchisee shall be $18,000. The Initial Franchise Fee for nontraditional
franchisees (such as convenience store operators, institutional food service
companies, colleges, schools, supermarkets, hospitals, factories, and other
nontraditional entities) shall be determined by Franchisor, but will range from
$1.00 to $10,000. Said fee is dependent upon the number of nontraditional
transactions executed, the location of the nontraditional franchisee, the
marketing area, the opportunity or lack thereof and other subjective concerns.
Each traditional and nontraditional franchisee in the Territory shall be
obligated to pay a continuing franchise fee of 6% percent of gross sales on a
weekly basis, subject to limited exceptions. All initial franchise agreements
shall be executed between Franchisor and each respective franchisee. From the
Initial Franchise Fees payable for nontraditional franchises, it is possible
that a significant portion will be retained by Franchisor and used for the
collective national marketing program coordinated by the Pasta Central
Subfranchise Advisory Council ("PCSAC"). Subfranchisor acknowledges that the
Initial Franchise Fees for nontraditional franchisees will be subject to use as
determined by PCSAC and Franchisor.
7.2 All traditional franchisees shall lease their Pasta Central Restaurant
premises from (a) corporation(s) owned by Franchisor. Nontraditional franchisees
shall generally not be obligated to lease their unit premises from (a)
corporation(s) owned by Franchisor, except as otherwise determined by
Franchisor. The sublease shall require the franchisee to pay for each and every
week of operation a sum equal to 6% of the gross sales of the franchise unit;
plus 4% of gross sales, to be deposited into an advertising account as provided
in Article 6 herein. The aforesaid 6% and 4% of gross sales are the same 6% and
4% of gross sales payable under the franchise agreement. The sublease duplicates
the obligations of the franchise agreement for enforcement and collection
purposes, however, payment under each respective Pasta Central Restaurant
sublease satisfies the payment obligation under the respective Pasta Central
Restaurant franchise agreement. Subfranchisor, upon the written request of
Franchisor, may as a representative (not agent) of Franchisor and in compliance
with each respective franchise agreement in the Territory, audit any
franchisee's books and records or inspect each franchisee's Pasta Central
Restaurant premises for determination of compliance with the respective
franchisee's obligations under its Pasta Central Restaurant franchise agreement.
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7.3 All revenues, as set forth in Articles 6 and 7, generated by the sale
and operation of franchised units within the Territory (except advertising
funds) shall be paid or caused to be paid to Franchisor. Provided that
Subfranchisor is in full compliance with its obligations hereunder, Franchisor
shall pay Subfranchisor one-half of the net funds from Initial Franchise Fees
paid by Pasta Central Restaurant franchisees in the Territory and one-half of
all continuing weekly franchise fees, which are currently 6% of gross sales,
paid by Pasta Central Restaurant franchisees in the Territory. Franchisor and
Subfranchisor agree that Franchisor shall not be deemed to have received any
portion of the Initial Franchise Fee paid pursuant to the decisions of PCSAC in
connection with the sales of nontraditional franchises. In the event of a
conflict between this paragraph and any other provision of this agreement, this
paragraph shall control.
7.4 Franchisor, upon receipt of good funds or clearance of any deposit,
shall then remit every 30 days as follows: (i) half to Subfranchisor and (ii)
half to Franchisor. Franchisor is hereby granted a security interest and lien
against any and all fees, or accounts payable by Franchisor to Subfranchisor to
secure full compliance by Subfranchisor of its obligations as provided herein.
7.5 At the request of Subfranchisor, along with the monthly payment due
the Subfranchisor herein from the collected franchise fees of each respective
franchisee in the Territory, the Franchisor shall provide a monthly report
describing the gross revenues generated by each franchisee, the fees received
from each franchisee and the monies payable to Subfranchisor.
7.6 Franchisor is further granted the right of set-off against any fees or
accounts payable to Subfranchisor from any and all fees or other monies
collected by Franchisor for which a portion is to be paid to Subfranchisor.
7.7 It is acknowledged that from each Initial Franchisee Fee, the
following fees will be deducted prior to the 50/50 division of net funds between
Franchisor and Subfranchisor: (i) a sales commission of up to $5,000 paid to the
Franchisor for its sales department, (ii) a design fee of $500-$l,000 paid to an
architect or designer, (iii) a training fee of $1,500 paid to the Pasta Central
training school for said franchise, (iv) a sales screener fee of $1,000 paid to
Franchisor, and (v) a fee of $500 payable to Franchisor for the establishment of
the Pasta Central leasing entity. Subfranchisor or its salesmen will not receive
a sales commission.
7.8 Subfranchisor acknowledges that if Franchisor creates a national
leasing coordinator position to help secure Pasta Central Restaurant leasing
locations from national or regional landlords, Subfranchisor shall contribute
$200 from its share of funds received from the sale of each Traditional
franchise agreement to be matched, in each instance, by Franchisor.
Subfranchisor agrees to participate in this program.
7.8.1 By way of example: From the sale of a $18,000 franchise in the
Territory, (i) a $5,000 sales commission will be paid to Franchisor, (ii) a
$1,500 training fee shall be retained by Franchisor for training, (iii) a $500
design and layout fee shall be retained by Franchisor for the design and layout
of the Pasta Central Restaurant, (iv) a $1,000 fee for sales screeners shall be
retained by Franchisor, and (v) a $500 fee for the formation of the Pasta
Central leasing
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corporation, minute book, first tax returns and any other leasing corporation
expenses that arise during the first 2 years of operation. The remaining balance
of the Initial Franchise Fee is divided equally between Franchisor and
Subfranchisor. Accordingly, it is anticipated that Subfranchisor will receive
the approximate sum of $4,750.
7.9 Each Pasta Central franchise agreement provides that upon the sale of
a Pasta Central restaurant, or a controlling interest in a corporation that owns
a Pasta Central restaurant, 5% of the gross sales price shall be paid to
Franchisor as a transfer fee. Franchisor will pay half of the 5% transfer fee to
Subfranchisor, provided Subfranchisor performs all operational and marketing
support required by the replacement franchisee.
8. AREA FRANCHISE DEVELOPMENT:
For the purpose of this Article, the following definitions shall control:
8.1 "One year" shall be defined as 365 days from the date of execution of
this agreement and each anniversary date thereafter.
8.2 "Open traditional Pasta Central Restaurant" shall be defined as an
open operating Pasta Central Restaurant in an approved location wherein a master
lease has been executed by a subsidiary of Franchisor, except where the leasing
requirement is waived by Franchisor, with a Pasta Central Restaurant franchise
agreement executed for said location.
8.3 "A nontraditional franchisee" shall be defined as described in
Franchisor's UFOC, and which opens within 6 months thereafter.
8.4 During the Term and any renewal terms of this agreement, Subfranchisor
shall reasonably operate and continue to operate a franchise sales program in
the Territory so that new franchisees for both new and existing Pasta Central
Restaurant locations may be obtained. In order to effectuate the foregoing,
Subfranchisor agrees to actively locally advertise for franchisees, network with
applicable organizations located in the Territory, provide all sales leads to
Franchisor, work with Franchisor's staff to respond to sales leads, process such
leads in a prompt and efficient manner, and generally function together with
Franchisor's sales department as a franchise sales organization. Subfranchisor
must also attend trade shows and implement any new systems and techniques
developed by Franchisor, or suggested by Franchisor, designed to attract new
franchisees to the Pasta Central system.
8.5 Subfranchisor has agreed to a minimum market development obligation in
order to ensure Franchisor that the Territory will be developed appropriately.
Franchisor will award all franchise agreements, but Subfranchisor will be
involved in the sale and/or development of the real estate wherein some or all
Pasta Central Restaurants are located. Accordingly, as a material condition of
this agreement, the following minimum number of Pasta Central Restaurants (which
include traditional or nontraditional Pasta Central Restaurants, excluding
distribution points) shall be opened in the Territory, directly or indirectly,
on a cumulative basis (i.e., excess stores opened in one year count toward
succeeding years' requirements) as follows:
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1st year Pasta Central Restaurants
2nd year Pasta Central Restaurants
3rd year Pasta Central Restaurants
4th year Pasta Central Restaurants
5th year Pasta Central Restaurants
6th year Pasta Central Restaurants
7th year Pasta Central Restaurants
8th year Pasta Central Restaurants
9th year Pasta Central Restaurants
10th year Pasta Central Restaurants
8.6 For years 11 through 50 after the date hereof, Subfranchisor shall
reasonably and affirmatively continue its best efforts to develop Pasta Central
Restaurants in the Territory. Franchisor and Subfranchisor shall establish
reasonable 5-year developmental obligations, considering relevant factors,
including market growth, nontraditional and new concept venues including
colleges, schools, sports stadiums and the like, for each year commencing on the
10th year after the date hereof and each 5-year anniversary thereafter with
appropriate credit granted to Subfranchisor for all open Pasta Central
Restaurants in excess of the minimum developmental obligations set forth above.
If the parties cannot agree, the issue shall be submitted to the American
Arbitration Association whose decision shall be final. The locale of all
arbitrations with the American Arbitration Association shall be in New York, New
York before a single arbitrator.
8.7 Subfranchisor further agrees that other forms of Pasta Central
distribution points may be developed. Accordingly in the event that Franchisor
develops additional distribution points, Subfranchisor agrees to exercise its
best efforts to help develop and implement such distribution points in the
Territory.
8.8 Notwithstanding anything to the contrary contained herein, in the
event Subfranchisor fails to comply with its development schedule as described
in Articles 8.4 and 8.5 herein, Subfranchisor shall lose its exclusive rights
granted herein; provided, however, this agreement shall remain in full force and
effect as to those Pasta Central Restaurants already sold as of the date of the
default including, without limitation, the rights to receive franchise fees
(Article 7).
8.9 If Subfranchisor fails to meet its development schedule, Franchisor
may develop the Territory itself, or through others by the sale of another
subfranchise, or otherwise, except that it will not construct nor permit others
to construct another Pasta Central Restaurant within a reasonable area of any
existing Pasta Central Restaurant located within the Territory. The term
"reasonable area" shall be defined as to each Pasta Central Restaurant, on a
case by case basis, by Franchisor and Subfranchisor.
8.10 If the "reasonable area" cannot or has not been agreed upon, the
issue shall be submitted to arbitration, before a single arbitrator, in
accordance with the rules of the American
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Arbitration Association, in New York, New York, whose decision shall be final.
8.11 Franchisor agrees to reasonably extend the development schedule of
Subfranchisor if delays are caused as a result of force majeure events or other
delays which are not the fault of Subfranchisor, such as disputes with
contractors, delays in obtaining permits, plans or variances or any other
reasonable delay, provided that a store premises is leased and a reasonable
attempt is being made to open the required number of Pasta Central Restaurants.
Nothing contained in this paragraph shall be deemed to modify Subfranchisor's
obligations in this Article 8. In no event, however, shall said time be extended
for more than 120 days unless such delays are caused by Franchisor.
9. INSPECTION:
Franchisor and Subfranchisor, upon 15 days prior written notice, shall
have the right to examine the books, records and supporting data of the other
with respect to the obligations, records and financial data, including
collections and disbursements, of the Territory at the principal place of
business of the other for audit purposes. Subfranchisor agrees to submit to
Franchisor annual uncertified profit and loss and balance sheet statements
prepared in accordance with generally accepted accounting principals. Any audit
or examination shall occur during normal business hours. During such audit, both
Franchisor and Subfranchisor shall use their best efforts to minimize any
interference with the other's business operations.
10. TAXES, LAWS AND LEASING CORPORATIONS:
10.1 Subfranchisor shall pay any and all Federal, City, State or local
taxes, fees, fines or assessments arising out of the operation of
Subfranchisor's business. Subfranchisor agrees to comply with all local laws,
orders, codes and ordinances applicable to Subfranchisor's business.
10.2 Franchisor and Subfranchisor acknowledge that, subject to compliance
with this agreement by Subfranchisor, including the provisions regarding Support
Services during the Term and any renewal terms, Subfranchisor is the equitable
owner of the franchise fees generated from the franchisees in the Territory
which fees are collected by Franchisor and 50% of which are then remitted to
Subfranchisor. In connection with Subfranchisor's share of any receipts
collected by Franchisor from franchisees in the Territory, Subfranchisor is
obligated to pay any applicable excise or gross receipts tax or other charges
payable under any applicable law as Franchisor is similarly obligated to pay any
applicable excise or gross receipt tax or other charge payable under applicable
law for its share of franchise fees collected from the Territory.
10.3 Subfranchisor and Franchisor agree to equally share any expense, fee
or charge payable in order to maintain each leasing corporation in the Territory
in good standing.
11. PILOT PASTA CENTRAL RESTAURANTS:
NONE.
12. LOCAL CODES AND ORDINANCES:
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Subfranchisor agrees to comply with all local laws, orders, codes and
ordinances applicable to Subfranchisor's business.
13. TERMINATION:
This agreement shall terminate in the event of the occurrence of any of the
following:
13.1 With respect to the termination rights of Franchisor:
13.1.1 At the election of Franchisor, in the event Subfranchisor fails to
meet any of its obligations contained in this agreement, including but not
limited to, the obligation to develop Pasta Central Restaurants as specified in
Article 8 herein, and where such default continues for 45 days, except as
otherwise set forth in Article 15 herein, without being cured after the mailing
of written notice of such default, by certified mail (return receipt requested)
by Franchisor.
13.1.2 Upon the bankruptcy or the appointment of a receiver for the assets
of Subfranchisor, however, so long as Subfranchisor is otherwise in full
compliance with this agreement Franchisor agrees that it will not exercise its
termination rights under this sub-article.
13.1.3 In the event this agreement is terminated pursuant to a default of
Subfranchisor's minimum unit development obligation pursuant to Article 8
herein, Subfranchisor shall retain all of its rights to receive its share of
continuing franchise fees from franchises opened in its territory prior to
termination, subject to strict compliance with all of the obligations (Support
Services, etc.) of Subfranchisor contained in Franchisor's UFOC, this agreement
and any amendments hereto. The terms of this sub-article shall survive the
termination of this agreement.
13.2 With respect to the termination rights of Subfranchisor:
13.2.1 At the election of Subfranchisor in the event Franchisor fails to
meet any of its obligations as specified herein and where such default continues
for 45 days without being cured after the mailing of written notice of such
default by certified mail (return receipt requested).
13.2.2 With respect to a default by either Franchisor or Subfranchisor,
each party shall be entitled to any and all lawful damages or rights and
remedies available at law or at equity but in no event shall Subfranchisor or
Franchisor be entitled to receive lost profits, or punitive or exemplary
damages. The successful party to such arbitration shall be entitled to receive
reasonable attorneys' fees not to exceed $30,000.
14. NOTICES:
14.1 No notice sent under any provision of this agreement shall be of any
effect unless it is sent by certified mail (return receipt requested), addressed
to the party for which it is intended at the following address:
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With respect to Franchisor:
At the address first above written and to
David L. Siegel, Esq., 740 Broadway
New York, New York 10003
With respect to Subfranchisor:
At the address first above written.
14.2 Notice so served shall be deemed received 5 business days after
mailing. Either party may change its address for service of notice at any time
by notice similarly served.
15. DEFAULT:
15.1 Franchisor shall not be in default of this agreement unless and until
Franchisor has received notice of such default by certified mail, (RRR) and a
reasonable period in which to cure said default. The minimum period of such cure
period shall not be less than 45 days after receipt of notice. In the event that
Franchisor is reasonably attempting to cure such default in a diligent and
expeditious manner and does in fact cure such default, Subfranchisor agrees that
it will reasonably extend the cure period.
15.2 Subfranchisor shall not be in default of this agreement unless and
until Subfranchisor has received written notice of default by certified mail
(RRR) and a reasonable period in which to cure said default. The minimum period
of such cure period shall not be less than 45 days after receipt of notice,
except for: (i) defaults with respect to the supplying of services to each Pasta
Central Restaurant franchisee in the Territory which shall be 15 days after
receipt of written notice, (ii) monetary defaults of obligations of
Subfranchisor to Franchisor, if any, or defaults of the development schedule
obligations as set forth in Article 8, which shall be 10 days after receipt of
written notice, and (iii) defaults of any applicable state or federal franchise
or securities law, which shall be 15 days after receipt of written notice. In
the event that Subfranchisor is reasonably attempting to cure such default in a
diligent and expeditious manner and does in fact cure such default, Franchisor
agrees that it will reasonably extend any cure period to enable Subfranchisor to
cure any default except for those set forth in (ii) herein.
16. MISCELLANEOUS:
16.1 This agreement has been executed in conformity with and shall be
governed by the laws of the State of New York or if required under the laws of
the state of the Territory, said laws shall control.
16.2 This agreement shall inure to and be binding upon the heirs,
executors, administrators, successors, and assigns of the respective parties
hereto and represents the entire agreement of the parties. Until this agreement
is executed by all parties, all offers, acceptances, written proposals, letters
of intent or other written or oral understandings shall be non-binding on the
parties and deemed preliminary negotiations.
16.3 This agreement shall inure to the benefit of the successors and
assigns of Franchisor.
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Franchisor shall have the right to transfer or assign this agreement to any
person or legal entity who assumes its terms and agrees to comply with
Franchisor's obligations contained herein. Franchisor shall have no liability
for the performance of any obligations contained in this agreement after the
effective date of such transfer or assignment.
16.4 This agreement cannot be changed, modified or terminated orally. This
is the entire agreement of the parties hereto.
17. CONSENT TO TRANSFER:
17.1 For all proposed transfers or assignments of this agreement, and
transfers of more than 51% of the outstanding and issued stock of Subfranchisor
by one or more transfers or any transfer which, directly or indirectly,
effectively changes ownership or management control of Subfranchisor, Franchisor
will not unreasonably withhold its consent to any transfer or assignment which
is subject to the restrictions of this Article, provided however, Franchisor
shall not be required to give its consent unless all of the following conditions
are met prior to the effective date of assignment:
17.1.1 Upon the execution of this agreement and upon each direct or
indirect transfer of an interest in this agreement, or in Subfranchisor, and at
any other time upon Franchisor's request, Subfranchisor shall, within 5 days
prior to such transfer, or at any other time at Franchisor's request, furnish
Franchisor with an estoppel agreement indicating any and all causes of action,
if any, that Subfranchisor may have against Franchisor, or that none exist, and
a list of all shareholders or partners having an interest in this agreement or
in Subfranchisor, the percentage interest of each shareholder or partner, and a
list of all officers and directors, in such form as Franchisor may require;
17.1.2 Subfranchisor's written request for transfer of either a partial or
whole interest in this agreement must be accompanied by an offer to Franchisor
of a right of first refusal at the same price offered by any bona fide buyer
less 5% percent. Franchisor shall have the right and option, exercisable within
15 days after receipt of written notification from the Subfranchisor, to send
written notice to Subfranchisor that Franchisor or its third-party designee,
intends to purchase the interest which is proposed to be transferred, on the
same terms and conditions offered by the third party less 5%. If Franchisor
accepts such offer, the 5% transfer/administrative fee due from Subfranchisor in
accordance with Article 17.1.8 shall be waived by Franchisor. Any material
change in the terms of an offer prior to closing shall cause it to be deemed a
new offer, subject to the same right of first refusal by Franchisor, or its
third-party designee, as in the case of the initial offer. Franchisor's failure
to exercise such option shall not constitute a waiver of any other provision of
this agreement, including any other requirements of this Article with respect to
the proposed transfer;
17.1.3 Subfranchisor is not in default under the terms of this agreement,
the Manuals or any other obligations owed Franchisor, and all of Subfranchisor's
then-due monetary obligations to Franchisor have been paid in full;
17.1.4 Subfranchisor and its shareholders or members, if Subfranchisor is
a corporation or
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limited liability company, have executed a general release, in a form prescribed
by Franchisor, of any and all claims against Franchisor, its affiliates,
subsidiaries, shareholders, directors, officers, subfranchisors and employees;
17.1.5 The transferee/assignee has demonstrated to Franchisor's
satisfaction that it meets all of Franchisor's then-current requirements for new
subfranchisors, including, without limitation, possession of good moral
character and reputation, satisfactory credit ratings, acceptable business
qualifications, and the ability to fully comply with the terms of this
agreement;
17.1.6 The transferee/assignee, its general manager and operational
employees responsible for the operation of the subfranchise business have
satisfactorily completed Franchisor's training program;
17.1.7 The transferee/assignee executes such other documents as Franchisor
may require, including a replacement subfranchise agreement on the then-standard
subfranchise agreement form used by Franchisor as modified by the business terms
set forth in this agreement, in order to assume all of the obligations of this
agreement, to the same extent, and with the same effect, as previously assumed
by the assignor; and
17.1.8 At the completion of Subfranchisor's sale transaction,
Subfranchisor shall pay to Franchisor an administrative/transfer fee of 5%
percent of the gross sales price of Subfranchisor's business, subfranchise
agreement and other assets.
17.2 Subfranchisor's rights may pass to Subfranchisor's next of kin or
legatee if they assume Subfranchisor's obligations and attend and complete
Franchisor's training program. Upon Subfranchisor's disability, Subfranchisor
may sell the subfranchise or keep it, if it is operated by trained personnel.
17.3 Franchisor's consent to a transfer shall not constitute a waiver of
any claims it may have against the transferring party arising out of this
agreement or otherwise.
17.4 If Subfranchisor is an individual, Franchisor hereby consents to the
assignment of this agreement and any and all obligations referable thereto
without any fee charged by Franchisor to a corporation principally owned by
Subfranchisor within 90 days from the date hereof. Upon such assignment and
assumption by the corporation along with delivery of executed originals of same
to Franchisor, the individual Subfranchisor shall be released from any and all
personal liability.
18. DISCLOSURE:
18.1 FRANCHISOR and SUBFRANCHISOR acknowledge that all of the business
terms and negotiations with respect to the offer and acceptance of this proposed
transaction occurred 15 business days (excluding holidays and weekends) or more
subsequent to the receipt of the (i) FRANCHISOR'S Pasta Central Subfranchise
Uniform Franchise Offering Circular (that includes Items 1 through 23, NEW YORK
ADDENDUM TO DISCLOSURE DOCUMENT and exhibits A-M as follows: Pasta Central
Subfranchise agreement (which
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Subfranchisor acknowledges is in all material respects identical to this
Agreement), Pasta Central Restaurant franchise agreement and nontraditional
rider, sublease, confidential information agreement, audited financial
statements of FRANCHISOR for the fiscal years ending June 30, 1999, 1998, and
1997, lists of: subfranchisors (i) currently operating and (ii) who have left
the system; leasing affiliates of FRANCHISOR; approved manufacturers; equipment
for sale by BI Concept Systems, Inc.; subfranchise manual-table of contents;
agents/agencies for service or process; receipts and in Item 3 the following
litigation disclosures: Ferguson, J.B. Ashley, Arodak, Seufert, Fast Eddie's,
Pischeria\Manfro, Moran, Peacox Ventures (2 proceedings), Trafalger, B.A.E.
Enterprises and Memon Corporation (ii) FRANCHISOR'S Pasta Central Restaurant
Uniform Franchise Offering Circular (that includes Items 1 through 23, NEW YORK
ADDENDUM TO DISCLOSURE DOCUMENT and exhibits A-O as follows: Pasta Central
Restaurant franchise agreement and nontraditional rider, sublease, sample
promissory note, confidential information agreement, audited financial
statements of FRANCHISOR for the fiscal years ending June 30, 1999, 1998, and
1997, lists of: franchisees (i) operating at year end; (ii) with signed
franchise agreements but stores not opened at start of fiscal year; and (iii)
who left the system; leasing affiliates of FRANCHISOR; approved manufacturers;
equipment for sale by BI Concept Systems, Inc.; operations manual-table of
contents; equipment financing documents; subfranchisors; agents/agencies for
service of process; receipts; and in Item 3 the following litigation
disclosures: Ferguson, J.B. Ashley, Arodak, Seufert, Fast Eddie's,
Pischeria\Manfro, Moran, Peacox Ventures (2 proceedings), Trafalger, B.A.E.
Enterprises and Memon Corporation, and further acknowledges that SUBFRANCHISOR
has received the salesman disclosure forms of SALESMAN NAME.
18.2 By execution hereof, SUBFRANCHISOR acknowledges that FRANCHISOR is
relying upon the following representation (paragraph 18) which include, inter
alia, that there have been no representations, forecasts, warranties or
statements made by FRANCHISOR or any of its salesmen, officers, directors,
employees or others including but not limited to franchise or subfranchise
sales, profits and/or growth potential.
19. NO REPRESENTATIONS, ETC.:
Subfranchisor warrants, represents and acknowledges that except for any
representation or warranty contained in Franchisor's UFOC:
19.1 There have been no representations, forecasts, inducements,
projections, warranties or statements made by Franchisor or any of its salesmen,
officers, directors, employees, or others, including but not limited to
franchise or subfranchise sales, profits and/or growth potential nor has
Subfranchisor relied upon any representations, forecasts, inducements,
projections, warranties or statements made by any entity involved in this
transaction;
19.2 Its independent decision to enter into this transaction, to
consultation and advice of counsel and that it has not been induced by any
promise or commitment not contained herein. This is the entire agreement of the
parties hereto;
19.3 No other salesman, staff member, entity, or associate of Franchisor
has met Subfranchisor regarding this subfranchise sale or the offer and
acceptance thereof except the
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salesmen set forth herein;
19.4 Subfranchisor acknowledges and agrees that it and its salesmen now
existing or hereinafter existing are not the agents of Franchisor nor may they
bind Franchisor unless agreed to in writing by Franchisor;
19.5 There have been no representations, warranties, inducements, pro
formas, forecasts, estimates or any other inducement or statement made by any
salesperson associated with Franchisor including the salesmen set forth herein
or Franchisor or its agents, salesmen, directors, officers, employees or any
other salesmen or other person or entity regarding financing, net profits, gross
profits, net sales, gross sales, costs or expenses of Pasta Central Restaurants
generally or of any specific Pasta Central Restaurant nor has the Subfranchisor
relied upon any representations, warranties, inducements, pro formas, forecasts,
estimates or any other inducement or statement made by Franchisor or its agents,
directors, officers, employees or salesmen or other associates or any
subfranchisor or any of any subfranchisors agents, directors, officers,
employees or salesmen or other associates, regarding financing, net profits,
gross profits, net sales, gross sales, costs or expenses of Pasta Central
Restaurants generally or of any specific Pasta Central Restaurant or with
respect to any other material fact relating to the development of Pasta Central
Restaurants in the area wherein the Subfranchisor intends to locate or develop
Pasta Central Restaurants or any other matter pertaining to Franchisor, any
subfranchisor, the Pasta Central chain or any other matter not set forth herein;
and
19.6 There have been no representations, warranties, inducements, pro
formas, forecasts, estimates or any other inducement or statement made by any
salesperson associated with Franchisor including the salesmen set forth herein
or Franchisor or its agents, salesmen, directors, officers, employees or any
other salesmen or other person or entity regarding subfranchise financing,
subfranchise net profits, subfranchise gross profits, subfranchise net sales,
subfranchise gross sales, subfranchise costs or expenses nor has the
Subfranchisor relied upon any representations, warranties, inducements, pro
formas, forecasts, estimates or any other inducement or statement made by
Franchisor or its agents, directors, officers, employees or salesmen or other
associates or any subfranchisor or any of any subfranchisors agents, directors,
officers, employees or salesmen or other associates, regarding subfranchise
financing, subfranchise net profits, subfranchise gross profits, subfranchise
net sales, subfranchise gross sales, subfranchise costs or subfranchise expenses
generally or specifically or with respect to any other material fact relating to
the development of Pasta Central Restaurants in the Territory or any other
matter pertaining to Franchisor, any subfranchisor, the Pasta Central chain or
any other matter not set forth herein.
PLEASE CIRCLE THE APPROPRIATE RESPONSE TO EACH STATEMENT AND INITIAL WHERE
INDICATED. IF YOUR ANSWER TO ANY QUESTION IS "NO", PLEASE EXPLAIN YOUR ANSWER IN
THE LINED SPACES PROVIDED AT THE END OF THIS AGREEMENT.
Subfranchisor has been represented by independent counsel who has reviewed
the UFOC, this Pasta Central subfranchise agreement and the Pasta Central
franchise agreement. If Subfranchisor elects not to use an attorney, it
acknowledges that it will be bound by the disclosures
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set forth in the UFOC, and the terms and provisions of this agreement, and that
any oral agreements or inducements, if any, will not be binding upon Franchisor.
YES NO __________
(Initial)
Subfranchisor is fully informed as to all of Subfranchisor's obligations,
and of Franchisor's obligations as set forth in this agreement and the UFOC.
YES NO __________
(Initial)
Subfranchisor has only had contact, negotiations and/or discussions with
the salesperson(s) and executives identified in this agreement and no other
regarding this subfranchise sale or the offer and acceptance of this agreement.
YES NO __________
(Initial)
Except for the salesperson(s) and executives identified in this agreement,
no other salesman, staff member, entity or associate of Franchisor met the
Subfranchisor regarding this subfranchise sale or the offer and acceptance of
this agreement.
YES NO __________
(Initial)
Subfranchisor acknowledges that Franchisor, its salesperson(s) any of
their agents, salesmen, directors, officers or employees or any other
salesperson(s), person or entity have not made, nor has Subfranchisor relied on
any representations, warranties, inducements, pro formas, forecasts, estimates
or any other inducements or statements regarding subfranchise financing,
subfranchise net profits, subfranchise gross profits, subfranchise net sales,
subfranchise gross sales, subfranchise costs or subfranchise expenses, generally
or specifically or with respect to any other material fact relating to the
development of Pasta Central Restaurants in the Territory or any other matter
pertaining to Franchisor, any subfranchisor, the Pasta Central chain or any
other matter not set forth herein.
YES NO __________
(Initial)
Subfranchisor understands that in entering into this agreement, Franchisor
is relying upon Subfranchisor's acknowledgments, representations and commitments
as stated in this Section.
YES NO __________
(Initial)
"NO" ANSWERS EXPLAINED HERE:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
IF YOU NEED MORE ROOM, PLEASE ATTACH EXTRA SHEETS OF PAPER
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20. ARBITRATION:
20.1 Franchisor and Subfranchisor acknowledge that disputes or
disagreements may arise during the term of this agreement and any renewals
thereto. Franchisor and Subfranchisor have elected to resolve such disputes or
disagreements in a non-judicial alternative dispute resolution format ("ADR").
An ADR format minimizes the expense of dispute resolution and generally can be
accomplished in a more expeditious and effective manner. By agreeing to an ADR
format, both Subfranchisor and Franchisor are also waiving a number of rights,
remedies and privileges which may arise in a judicial resolution format. In
view, however, of the continuing relationship between Subfranchisor and
Franchisor under the original and renewal terms of this agreement, both
Subfranchisor and Franchisor agree that an ADR format is the most economical,
efficient and practical way to resolve disputes and disagreements.
20.2 Accordingly, except as otherwise provided in this agreement, in the
event of any dispute or disagreement between Franchisor and Subfranchisor with
respect to any issue arising out of or relating to this agreement, its breach,
its interpretation or any other disagreement between Subfranchisor and
Franchisor, such dispute or disagreement shall be resolved by arbitration. In
the event of any dispute or disagreement, Subfranchisor and Franchisor both
agree to submit the dispute to arbitration in accordance with the least
expensive procedure of the American Arbitration Association ("AAA"), and the
application for such arbitration shall be filed in the AAA's New York City
office . Franchisor and Subfranchisor agree that the hearing(s) shall be held in
New York City, State of New York before one arbitrator. This paragraph shall not
apply to any monetary defaults of Subfranchisor or defaults of Article 8 herein
and Franchisor shall be free to utilize any right or remedy it may have at law
or equity. However Franchisor shall be entitled to seek declaratory judgements
or decisions about its status with Subfranchisor or its compliance with this
agreement or to establish the existence of a of default by Subfranchisor or for
any other relief that may be appropriate.
20.3 Franchisor and Subfranchisor agree that this agreement evidences a
transaction involving interstate commerce and that the enforcement of this
arbitration provision and the confirmation of any award issued to either party
by reason of an arbitration conducted pursuant to this arbitration provision is
governed by the Federal Arbitration Act, 9 U.S.C. ss. 1 et seq.
20.4 Lost profits, punitive or exemplary damages or attorneys' fees
exceeding $30,000 may not be awarded by the arbitrator, and any such award shall
not be enforceable or enforced in any court. If the waiver of lost profits, or
punitive or exemplary damages or attorneys' fee limitation, is in whole or in
part in violation of the laws of the state where Subfranchisor's Territory is
located, that law shall control, and any such award shall be enforceable or
enforced in any court of appropriate jurisdiction. In no event can any of the
provisions of this agreement, including but not limited to Article 8 as
specified in this agreement, or in amendments to this agreement or in the
Manuals, be modified or changed by the arbitrator.
20.5 With respect to any legal proceeding authorized by this agreement,
Subfranchisor and Franchisor each agree that they will commence such legal
proceeding only in the Federal District Court for the Southern District of New
York, and both Franchisor and Subfranchisor
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consent to the jurisdiction in the Federal District Court for the Southern
District of New York. In the event the parties do not meet the jurisdictional
requirements for Federal District Court, the parties consent to jurisdiction in
the Supreme Court, New York County, State of New York. Subfranchisor agrees that
mailing to its last known address by certified mail of any process shall
constitute lawful and valid process. In all cases, Subfranchisor and Franchisor
each waives any right to a trial by jury. Notwithstanding the foregoing, if the
laws of the state where Subfranchisor's Territory is located requires
jurisdiction of the courts of that state or control by the laws of that state,
then this agreement shall be deemed modified to comply with such requirement.
20.6 The terms of this article shall survive termination, expiration or
cancellation of this agreement.
21. RESTAURANT TRANSFER FEE:
Each Pasta Central Restaurant franchise agreement provides that upon the
sale of a Pasta Central Restaurant or controlling interest in a corporation that
owns a Pasta Central Restaurant, 5% of the gross sales price shall be paid to
Franchisor as a transfer fee. In connection therewith, provided Subfranchisor is
not in default of this agreement, Franchisor agrees to share equally the 5% fee
with Subfranchisor, provided Subfranchisor provides any and all necessary
operational assistance and Pasta Central Restaurant supplementary training for
the transferee franchisee at its own expense. Notwithstanding the foregoing, if
the Pasta Central Restaurant franchisee is owned by Subfranchisor or the
stockholders of Subfranchisor, no transfer fee shall be charged for transfers of
the outstanding and issued shares of the corporate Subfranchisor to another
corporation owned by Subfranchisor or between existing stockholders of the
Subfranchisor and their immediate families (mother, children, wife, husband,
father, brother or sister) or by bequest, devise, operation of law or otherwise
in the event of the death of any of the stockholders of Subfranchisor.
22. COOPERATIVE:
Subfranchisor hereby agrees that it will join Franchisor's subfranchisor
advertising cooperative association. The monthly fees payable by Subfranchisor
to the advertising cooperative have been established by population and will
range from $300.00 per month to $700.00 per month. Subfranchisor's fee shall be
$FEE per month for the Territory as defined herein. Subfranchisor hereby agrees
to pay such fees as incurred.
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IN WITNESS WHEREOF, the parties hereof have executed this agreement as of
the date of execution by Franchisor.
PASTA CENTRAL CO.,
AN UNCORPORATED DIVISION OF
BLIMPIE INTERNATIONAL , INC..
______________ By: ________________________________
Date of Execution Vice President
Subfranchisee Corp Name
______________ By: ________________________________
Date of Execution Individual Name, Title
NAME OF STOCKHOLDERS AND OFFICERS
The names and addresses of all stockholders of the corporate Subfranchisor are
set forth below.
By:_________________________________
Name, Title
_______________________________
Address
By:_________________________________
Name, Stockholder
_______________________________
Address
22
Exhibit 10.49
FRANCHISE AGREEMENT
THIS AGREEMENT made this day of <<Month>>, ______, by and between Smoothie
Island Co., an unincorporated division of Maui Tacos International, Inc., a
Georgia corporation, located at 1775 The Exchange, Atlanta Georgia, 30339 (the
"Franchisor"), and <<FranchiseName>> located at <<FranchiseeAddress>> (the
"Operator," as also defined in Article 10):
DEFINITIONS
In this Agreement the following capitalized terms shall have the meanings
set forth below, unless the context otherwise requires:
(i) A SMOOTHIE ISLAND EXPRESS(TM) Branded Product is any product now
existing or developed in the future that bears Franchisor's Marks and is sold by
some or all SMOOTHIE ISLAND EXPRESS Franchisees or Franchisor or other entities
such as supermarkets, grocery stores or convenience stores.
(ii) A Smoothie Island Express Distribution Point or Distribution Point is
any system other than a SMOOTHIE ISLAND EXPRESS juice bar, where Authorized
Smoothie Island Express Products using Franchisor's Marks are sold, such as
carts, kiosks, vending machines or other product distribution systems developed
now or in the future and authorized by Franchisor.
(iii) A SMOOTHIE ISLAND EXPRESS juice bar is a retail installation,
whether a Traditional or a Nontraditional juice bar, that specializes in the
sale of Authorized Smoothie Island Express Products, as defined below, is
operated under Franchisor's Marks, as defined below, and is authorized by a
Franchise or License Agreement made or approved by Franchisor.
(iv) A Nontraditional SMOOTHIE ISLAND EXPRESS juice bar is located within
another primary business or in conjunction with other businesses, some of which
may be other fast-food type operations. A Nontraditional SMOOTHIE ISLAND EXPRESS
Juice bar will likely be installed within other primary businesses or within a
multi-branded facility where other branded or nonbranded businesses share common
space.
(v) A Traditional SMOOTHIE ISLAND EXPRESS Juice bar is a retail business
premises that exists primarily as a SMOOTHIE ISLAND EXPRESS juice bar. However,
it may also have other types of businesses located in it, but in such case the
SMOOTHIE ISLAND EXPRESS juice bar is the primary business.
(vi) A Smoothie Island Express "System Operation" is a traditional or
non-traditional SMOOTHIE ISLAND EXPRESS juice bar from which Smoothie Island
Express Authorized Products are sold for on-premises and off-premises
consumption and from which Authorized Smoothie Island Express Products may be
delivered for off-premises consumption.
(vii) Authorized Products or Smoothie Island Express Authorized Products
are products approved or authorized by Franchisor in accordance with the
provisions of this
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Agreement.
(viii) UFOC is the uniform franchise offering circular received by the
Operator at least 10 business days prior to the execution of this agreement.
WHEREAS, Franchisor is the owner of the trademark "SMOOTHIE ISLAND", which
has been filed for registration with the United States Patent and Trademark
Office of the United States of America, and may, in the future become the owner,
licensee and/or authorized distributor for other trademarks, including logos and
designs, related or unrelated to Franchisor's Marks (referred to in this
Agreement as "Franchisor's Marks"); and
WHEREAS, Franchisor has developed and continues to develop a system for
merchandising Smoothie Island Express authorized products, which system includes
distinctive signs, recipes, uniforms, various trade secrets and other
confidential information, and in some cases also includes architectural designs,
equipment specifications, layout plans, inventory, record-keeping and marketing
techniques (the "System") which are materially reflected in Franchisor's
Operations Manual and other manuals disseminated by the Franchisor
(collectively, the "Manuals"). Franchisor identifies the System by Franchisor's
Marks, and such other Trademarks, service marks, trade names, logos and designs
as may be designated by Franchisor in writing as being authorized for use in the
System. Franchisor's Marks identify for the public the source of the services
rendered in accordance with the standards and specifications established by
Franchisor; and
WHEREAS, the System as used in existing and future Traditional and
Nontraditional SMOOTHIE ISLAND EXPRESS juice bars and Distribution Points have
established or will establish a reputation for quality, cleanliness, appearance
and service, and through such operations and continued marketing and advertising
efforts, have created demand and goodwill for the authorized Smoothie Island
Express food products sold as a result of which the System has acquired valuable
goodwill and a favorable reputation; and
WHEREAS, Operator desires to enjoy the benefits of (i) operating under the
System and using Franchisor's Marks, and (ii) being authorized and licensed to
operate one System Operation as set forth below within the System in strict
accordance with the standards and specifications established by Franchisor; and
WHEREAS, Franchisor is willing to grant Operator a license under
Franchisor's Marks and the System, subject to Operator's strict compliance with
the terms and conditions of this Agreement;
NOW, THEREFORE, the parties agree as follows:
ARTICLE 1. FRANCHISE RIGHT GRANTED, LOCATION.
1.1 GRANT.
In consideration of the issuance of the franchise granted herein, Operator
shall pay to
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Franchisor the non-refundable sum of $<<Price>> (the "Initial Fee"). In
exchange, Franchisor hereby awards Operator the exclusive right to open and
operate, under the terms of this Agreement, one System Operation specializing in
selling high quality limited and specific food items as specified by Franchisor
in Franchisor's Operations Manual, or subsequently added in accordance with
Operations Manual amendments, under the name "SMOOTHIE ISLAND EXPRESS" at a
location to be mutually agreed upon by both parties. No exclusive or protected
market is granted by this Article. The Initial Fee shall be deemed fully earned
by Franchisor upon the execution of this Agreement by Franchisor and Operator
and shall not be refunded, in whole or in part, upon any termination of this
Agreement, or at any other time or under any other circumstances.
1.2 LICENSE.
Franchisor hereby grants and awards to Operator, for the term set forth in
this Agreement, and any renewal term, beginning on the date of this Agreement,
the right and license, and Operator hereby undertakes the obligation, to operate
the business described in this Agreement under Franchisor's Marks and such other
of Franchisor's Marks as may be designated by Franchisor, to operate such
business solely in accordance with the System, and only at the specific location
to be agreed upon by Franchisor and Operator (the "Location").
1.3 LOCATION.
No Location has been agreed upon at the time of the execution of this
Agreement. Upon the leasing of the Location, Operator agrees to sublet the
Location from an independent corporation designated by Franchisor, on the
approved sublease form annexed to Franchisor's UFOC, as further defined in
Article 18. Any material violation of the sublease that is not cured after
notice is given and within the applicable grace periods, as required by the
terms of the sublease for the Location, is a violation of this Agreement. The
signing of the sublease for the Location, or Operator's or any of its principle
stockholder's or officer's written approval of the master lease for the
Location, shall constitute Operator's approval of the Location. Operator shall
engage only in the business of operating a System Operation at the Location and
no other, except with Franchisor's prior written consent. Operator acknowledges
its sole responsibility for finding the Location and that Franchisor is not
obligated to directly or indirectly obtain an approved location for Operator.
Franchisor's area subfranchisor, if any, as identified herein, however, may
voluntarily (without obligation) assist Operator in obtaining an approved
location, as well as other approved locations for other System Operation
operators who have executed existing franchise agreements.
ARTICLE 2. INSTALLATION AND COMMENCEMENT OF BUSINESS.
Operator, at its own expense, shall (i) renovate the Location into a
System Operation; (ii) obtain all necessary governmental permits and licenses
prior to beginning the renovation of its Location into a System Operation and
Operator shall fully complete the renovation, construction and equipping within
a reasonable time thereafter. Operator shall commence operation of each System
Operation no later than thirty (30) days following substantial completion of the
renovation and equipment installation at the Location, and shall give Franchisor
ten (10) days
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written notice prior to commencing operations. In no event shall Operator
construct or remodel the interior or exterior of any System Operation or make
any improvements which vary from the then-current standards, plans, and
specifications approved by Franchisor, without first obtaining Franchisor's
prior written approval. Operator, at its own expense, shall obtain all municipal
and state licenses necessary to operate Operator's System Operation prior to
commencing business at its System Operation and shall maintain all licenses in
full force and effect during the term of this Agreement.
ARTICLE 3. TRAINING.
3.1 Operator will designate individuals (up to 4 persons) as trainee(s) to
attend Franchisor's training school in Atlanta, Georgia (the "Smoothie Island
Express Training School") or at another training location selected by
Franchisor. Franchisor will offer initial training programs for Operator and its
management employees at times selected by Franchisor. Franchisor will bear the
costs of providing training programs, including the overhead costs of training,
staff salaries, materials, and all technical training tools. Operator shall pay
all traveling, living, compensation, and other expenses incurred by Operator
and/or Operator's employees in connection with attendance at training programs.
The training program and manner of conducting such program shall be at
Franchisor's sole discretion and control. The training course will be structured
to provide practical training in the implementation and operation of a System
Operation as described in the UFOC.
3.2 Operator will not allow any System Operation to be opened or managed by any
person who has not attended and successfully completed the management training
course designated by Franchisor. If Operator is an individual, and does not
manage its System Operation on a day-to-day basis, and in the event its
designated System Operation manager resigns or is terminated, Operator must
arrange to have the successor juice bar manager (i) begin the required training
course within forty-five (45) days of first assuming the duties of a juice bar
manager and (ii) successfully complete the course. If Operator successfully
completes the training program, the required training course conducted at
Franchisor's facilities will not extend beyond two (2) weeks. However, the
course conducted at Franchisor's facilities, requires an additional 40 hours of
operational training in a Franchisor approved System Operation as a
prerequisite.
3.3 If at any time the trainee voluntarily withdraws from, or is unable to
complete its training, or fails to demonstrate an aptitude, spirit or ability to
comprehend and carry out the course of study to the reasonable satisfaction of
Franchisor, then Franchisor shall have the right to require Operator's trainee
to attend other training class(es) or to perform additional operational training
until Franchisor is reasonably satisfied that Operator's trainee has
satisfactorily completed the training course. Operator may not open its System
Operation until training is completed to Franchisor's reasonable satisfaction.
3.4 In the event of a sale to a third party of Operator's System Operation after
opening, the transferee must be trained in the Smoothie Island Express Training
School as a condition of Franchisor's consent to such transfer. All tuition
costs for such training shall be deemed paid upon receipt by Franchisor of five
percent (5%) of the sales price of operator's System Operation due in accordance
with Article 14 herein. In the event of an approved non-sale management
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transfer to a third party of Operator's System Operation, the transferee shall
attend the Smoothie Island Express Training School and pay to Franchisor the
training fee, which fee shall not exceed $1,500. No System Operation shall open
or re-open until the Smoothie Island Express Training School certifies that the
transferee is approved to operate the respective System Operation.
3.5 Additional training sessions are available at Operator's request and
expense, and at Franchisor's request, at Operator's expense, except for the
initial training course itself. Operator's attendance at additional training
sessions is mandatory if they are scheduled in Operator's state. For this
additional training, Franchisor will provide the instructors and instructional
materials, but Operator must arrange for transportation, lodging and food for
itself and/or its manager. The cost will depend on distance Operator must travel
and the type of accommodation chosen. Additionally, Operator must attend
regional meetings, when and if established by Franchisor, and must attend annual
national conventions, when and if scheduled.
ARTICLE 4. MANUALS AND STANDARDS OF OPERATOR QUALITY, CLEANLINESS AND SERVICE.
4.1 STANDARDS.
In order to promote the value and goodwill of Franchisor's Marks and the
System and to protect Franchisor's Marks and the other SMOOTHIE ISLAND EXPRESS
operators who comprise the Smoothie Island Express franchise system, Operator
agrees to conduct its business in accordance with the standards promulgated by
Franchisor as follows:
4.2 MANUALS.
4.2.1 In the Manuals and other publications, Franchisor will list
authorized products to be sold by Operator, and promulgate standards of
operation for System Operations, including standards of quality, cleanliness,
and service for all product line items, furnishings, interior and exterior
decor, supplies, fixtures, and equipment used in connection with each System
Operation. Operator agrees to operate its System Operation in accordance with
the standards, specifications and procedures set forth in the Manuals, this
Agreement and the sublease for the Location. Operator further agrees that
changes in the menu, or the standards, specifications and procedures may become
necessary from time to time and agrees to accept as reasonable all
modifications, revisions and additions to the Manuals as authorized by
Franchisor. The sale of any product or service at the Operator's Location,
without Franchisor's prior written approval shall constitute a material
violation of this Agreement.
4.2.2 The Manuals and all amendments to the Manuals (and copies thereof)
are copyrighted and remain Franchisor's property. They are loaned to Operator
for the term of the Agreement, and must be returned to Franchisor upon the
Agreement's termination, expiration or nonrenewal. The Manuals are highly
confidential documents which contain certain trade secrets of Franchisor, and
Operator shall never reveal, and shall take all reasonable precautions, both
during and after the term of this Agreement, to assure that its employees or any
other party under Operator's control, shall never reveal any of the contents of
the Manuals or any other publication, recipe or secret provided by Franchisor,
except as is necessary for the operation of
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Operator's System Operation.
4.3 HOURS.
Franchisor and Operator agree that the hours of operation of Operator's
System Operation are at a minimum, 10:00 am. to 12:00 p.m. (midnight), seven
days per week, and Operator agrees to operate its System Operation during such
hours. If the Location is in a mall or shopping center, the hours of the mall or
shopping center shall control. Operator shall diligently and efficiently
exercise its best efforts to achieve the maximum gross sales possible from its
location, and will be open for business not less than 14 hours per day, seven
days per week, unless additional opening hours are reasonably required to
maximize operations and sales. If such hours are incorrect in relation to the
sales potential of Operator's System Operation, then Franchisor and Operator
shall reasonably adjust such hours by jointly establishing new hours of
operation. It is acknowledged that the hours of other operators will vary in
relation to each respective location, and local legal restrictions, if any.
4.4 APPEARANCE.
From time to time, Operator's System Operation may need a cosmetic
improvement or equipment change or addition in order to comply with the Manuals
and/or to maintain proper operations and an aesthetic appearance and
professional image. Accordingly, Franchisor may require remodeling and
renovation, and modifications to existing equipment and improvements as is
reasonably necessary. Franchisor shall not require any such work at a particular
System Operation less than three (3) years after the opening of the System
Operation except: (i) for additional equipment if authorized product line
preparation methods or products are developed and authorized by Franchisor; (ii)
if repairs or repainting are necessary to maintain the appearance of the
interior and exterior of the Location in a clean and orderly condition
satisfactory to Franchisor; or (iii) upon the sale of the Operator's System
Operation. Within ninety (90) days after receipt of written notice, Operator
shall fully implement and complete such changes to its System Operation
operating under this Agreement.
4.5 PRODUCT LINE AND SERVICE.
Operator agrees to only serve the approved limited product line items
specified by Franchisor in this Agreement or in the Manuals and to follow all
specifications and formulas of Franchisor as to specifications, contents, weight
and quality of products served to its customers from Operator's System
Operation.
4.6 CONTAINERS, FIXTURES AND OTHER GOODS.
4.6.1 Operator agrees that all authorized product line items will be
served in containers bearing accurate reproductions of Franchisor's Marks. All
containers, bags, cups, menus and other packaging and like articles used in
connection with Operator's System Operation shall conform to Franchisor's
specifications, shall be imprinted with Franchisor's Marks and shall be
purchased by Operator from a distributor or manufacturer approved in writing by
Franchisor, as provided in Article 8, which approval will not be unreasonably
withheld.
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4.6.2 No item of merchandise, furnishings, interior and exterior decor
items, supplies, fixtures, equipment or utensils bearing any of Franchisor's
Marks shall be used in or upon any System Operation unless the same shall have
been first submitted to and approved in writing by Franchisor.
ARTICLE 5. MENUS, UNIFORMS, INSPECTIONS, SIGNS.
5.1 MENUS.
5.1.1 Operator shall not manufacture, advertise for sale, sell or give
away any product unless such product has been approved in the Manuals as an
authorized product for sale in Operator's System Operation and not thereafter
disapproved in writing by Franchisor. All approved products shall be distributed
under the specific name designated by Franchisor. Operator shall establish all
menu prices in its sole discretion. Operator shall offer for sale in its System
Operation only those food products which Franchisor designates as "approved
and/or authorized" or which Franchisor has made available as a "regionalized"
menu or has otherwise specifically approved in writing (each, "Authorized
Product"). No standard product will be removed from the menu unless Operator is
so instructed by Franchisor.
5.1.2 Such "Authorized" and/or "Approved" Products shall be marketed by
approved menu formats to be utilized in Operator's System Operation. The
approved and authorized menu and menu format(s) may include, in Franchisor's
discretion, requirements concerning organization, graphics, product
descriptions, illustrations, and any other matters (except prices) related to
the menu, whether or not similar to those listed. In Franchisor's discretion,
the menu and/or menu format(s) may vary depending upon region, market size, and
other factors. Franchisor may change the menu and/or menu format(s) from time to
time or region to region or authorize tests from region to region or authorize
non-uniform regions or non-uniform System Operation(s) within regions, in which
case Operator will be given a reasonable time (not longer than thirty (30) days)
to discontinue use of any old menu format(s) and implement use of the new menu
format(s).
5.1.3 Operator shall, upon receipt of notice from Franchisor, add any
Authorized Product to its menu according to the instructions contained in the
notice. Operator shall have a minimum of thirty (30) days after receipt of
written notice in which to fully implement any such change. Operator shall cease
selling any previously approved product within thirty (30) days after receipt of
notice that the product is no longer approved.
5.1.4 The Authorized Products sold by Operator shall be of the highest
quality, and the ingredients, composition, specifications, and preparation of
such food products shall comply with the instructions and recipes provided by
Franchisor or contained in Franchisor's Operations Manual, and with the further
requirements of Franchisor as they are communicated to Operator from time to
time.
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5.2 COMPLIANCE.
Operator shall operate each of its System Operation as a clean, orderly,
legal and respectable place of business in accordance with Franchisor's business
standards and merchandising policies, and shall comply with all applicable
ordinances, laws, statutes and regulations governing the operation of such
premises, including all disability, food and drug laws and regulations. Operator
shall not allow any Location or part of a Location to be used for any immoral or
illegal purpose.
5.3 SIGNS, DESIGNS AND FORMS OF PUBLICITY.
5.3.1 Operator shall maintain a suitable sign or awning at, on, or near
the front of the Location, identifying the Location as a "SMOOTHIE ISLAND
EXPRESS Juice Bar". Such sign shall conform in all respects to Franchisor's
requirements and in accordance with the layout and design plan approved for the
Location, except to the extent prohibited by local legal restrictions.
5.3.2 No exterior or interior sign or any design, advertisement, internet
address, "web page" or world wide web home page, sign, or form of publicity,
including form, color, number, location, and size, shall be used by Operator or
any Association (as defined below) unless first submitted to Franchisor and
approved in writing (except with respect to prices). Any request by Operator for
such approval shall be properly submitted in duplicate to: (i) Franchisor's
Legal Department, Attention: General Counsel, 740 Broadway, New York, New York
10003; and (ii) Franchisor's President, 1775 The Exchange, Suite 540, Atlanta,
Georgia, 30339. Franchisor shall respond to such request within thirty (30) days
of its receipt. Whenever Operator elects to utilize, in the form supplied,
advertising supplied by Franchisor or any promotional item specifically approved
by Franchisor, no further approval for use of such material is required. Upon
written notice from Franchisor, Operator shall discontinue and/or remove any
objectionable advertising materials or any other materials not suitable for
display, in Franchisor's sole discretion.
5.4 UNIFORMS AND EMPLOYEE APPEARANCE.
Operator shall cause all employees, while working in System Operation, to:
(i) wear uniforms of such color, design, and other specifications as Franchisor
may designate from time to time, and (ii) present a neat and clean appearance.
If the type of uniform utilized by Operator is removed from the list of approved
uniforms, Operator shall have sixty (60) days from receipt of written notice of
such removal to discontinue use of its existing inventory of uniforms and
implement the approved type of uniform.
5.5 VENDING OR OTHER MACHINES.
Operator shall not permit vending or game machines or any other mechanical
device to be installed or maintained in its Location without Franchisor's prior
written approval.
5.6 INSPECTION.
5.6.1 Franchisor's authorized representatives shall have the right to
enter upon the
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entire main floor and basement of Operator's System Operation during business
hours, without disrupting Operator's business operations, for the purposes of
examining same, conferring with Operator's employees, inspecting and checking
operations, beverages, furnishings, interior and exterior decor, supplies,
fixtures, and equipment, and determining whether the business is being conducted
in accordance with this Agreement, the System and the Manuals.
5.6.2 In the event any such inspection indicates any deficiency or
unsatisfactory condition with respect to any matter required under this
Agreement or the Manuals, including but not limited to quality, cleanliness,
service, health and authorized product line, Franchisor will notify Operator in
writing of Operator's non-compliance with the Manuals, the System, or this
Agreement. Operator shall have twenty-four (24) hours after receipt of such
notice, or such other greater time period as Franchisor in its sole discretion
may provide, to correct or repair such deficiency or unsatisfactory condition,
if it can be corrected or repaired within such period of time. If not, Operator
shall within such time period commence such correction or repair and thereafter
diligently pursue it to completion.
ARTICLE 6. ADVERTISING.
6.1 Operator and Franchisor acknowledge the value of advertising and accordingly
Operator agrees to pay 2% of its gross sales for each and every week of its
operations to Franchisor (the "Advertising Fee"). These funds will be deposited,
at Franchisor's sole discretion, into a segregated advertising account (with
other advertising collections) controlled by Franchisor. Advertising payments
will then be spent for advertising to benefit Operator and/or all or regional
operators of System Operations. The Advertising Fee shall be paid in accordance
with the procedure described in Article 9.
6.2 Franchisor, at its sole discretion, may spend the collected fees directly,
or may authorize payment of the advertising collections for media time,
production of media materials, whether for radio, television, newspapers or
store level materials such as flyers, or posters, or for any other type of
advertising or marketing use. Franchisor is not, under any circumstances,
obligated to contribute to any national or local advertising fund, program or
other organization, any advertising fees or contributions.
6.3 Operator acknowledges receipt of Franchisor's UFOC which refers to (a)
Smoothie Island Express Brand Building Fund, Inc. ("SIBBF"); (b) the Council of
Smoothie Island Express Suppliers; (c) a research and development fund; and (d)
the Grand Opening event as explained below.
6.4 As described in the UFOC, SIBBF is the non-profit entity authorized to
receive marketing allowances and payments from Smoothie Island Express
distributors, manufacturers and other entities that are associated in business,
directly or indirectly, with Franchisor or the System or its operators or any
part thereof. The activities of SIBBF are controlled by the Franchisor subject
to the advice and counsel of the Smoothie Island Express Operator Advisory
Board. By this Agreement, Operator consents to the receipt of such funds by
SIBBF or its successors, as well as the expenditure thereof for advertising and
marketing expenses. These expenses may include costs for personnel, management
fees, advertising agencies, operating
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expenses, matching fund programs, research and development, administrative
expenses, production of educational or training materials, production of
commercials, focus groups or other studies, the purchase of television or radio
or other media time, print advertising, facility design studies or
modifications, consultants and such other marketing and advertising uses as may
be authorized by the Franchisor.
6.5 By execution of this agreement Operator consents to the formation and
existence of the Smoothie Island Express Brand Building Fund, Inc., its right
and privilege to seek voluntary contributions of 1% to 3% of gross sales, or any
higher fee or a flat fee if a sales percentage is not practical, from all
Smoothie Island Express manufacturers, distributors, vendors and purveyors who
sell products or provide services to the Smoothie Island Express System or
Smoothie Island Express Brand Building Fund, Inc., and the system of authorizing
utilization of these collections and any resulting expenditures thereafter.
6.5.1 The Council of Smoothie Island Express Suppliers is an association
composed of approved manufacturers, distributors and the Franchisor, established
for the purposes of improving communication between manufacturers and
distributors, and improving distribution and development of improved Authorized
Products. This Council reimburses Franchisor for employee and other expenses
involved in the distribution and manufacturing of Raw Materials. Operator
consents to the receipt of such funds by Franchisor;
6.5.2 Franchisor and certain manufacturers have agreed to established a
research and development fund for improvement of specific Authorized Products
and Operator consents to Franchisor's receipt of reimbursement funds arising
from expenses incurred in such research and development.
6.5.3 In addition to the Advertising Fee, Operator agrees to spend a
minimum of $1,000 for its "Grand Opening" promotion as designated by Franchisor.
The "Grand Opening" event is required for all operators and functions to
introduce Operator's System Operation to the public. The application and use of
the "Grand Opening" funds shall be controlled by Franchisor's marketing
department.
ARTICLE 7. COMPANY MARKS AND ADDITIONAL MARKS.
7.1 The license and related rights to use the System, the Manuals, Franchisor's
Marks and any other proprietary products granted by this Agreement are
applicable only with respect to Operator's System Operation at the Location, and
not elsewhere, except in the event of a relocation approved in writing by
Franchisor. This Agreement does not authorize the use of mobile vending
vehicles, carts, kiosks or any other non-traditional delivery systems.
7.2 Operator shall not interfere in any manner with, or attempt to prohibit, the
use of Franchisor's Marks and/or the System by any other Operator of Franchisor
or in connection with Nontraditional SMOOTHIE ISLAND EXPRESS locations,
distribution points or any other system used to distribute Smoothie Island
Express authorized or branded products.
7.3 Franchisor may, from time to time, in Franchisor's sole discretion, obtain
additional
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trademark and/or service mark rights in words and/or designs. In the event of
any of these occurrences, Franchisor may license Operator to use those
trademarks or service marks by giving written notification to Operator that such
marks now form part of Franchisor's Marks. The term of such license will be
coextensive with the term of this Agreement or as otherwise established by
Franchisor, and will be subject to all restrictions with respect to the use of
those rights as set forth in this Agreement and in the notice granting Operator
the license.
7.4 Franchisor is not obligated by this Agreement or otherwise, to protect
Operator's right to use the trademarks, service marks, etc., or to protect
Operator against claims of infringement or unfair competition of the
trademarks/service marks .
ARTICLE 8. DISTRIBUTION, MANUFACTURE, AND PURCHASE OF EQUIPMENT,
SUPPLIES, AND OTHER PRODUCTS.
Operator agrees to use only Franchisor's approved products and portion
control formulas in the preparation of Authorized Products. Operator further
agrees to only buy Raw Materials, as defined below, manufactured in accordance
with Franchisor's specifications from approved manufacturers, distributed by
approved distributors, and sold to Operator as follows:
8.1 DEFINITIONS.
8.1.1 For the purpose of this Agreement, "distributor" is defined as any
entity, except a manufacturer, that directly or indirectly delivers raw
materials to the Operator. A "manufacturer" is defined as the entity that
manufactures and/or sells the Raw Materials to a distributor. Raw Materials
means all of the products purchased from distributors, and/or manufactured or
sold by manufacturers or production entities which are used in the creation of
Authorized Products. Raw Materials include, but are not limited to, sorbets,
yogurt, supplements, cups, printed paper goods (the "Raw Materials").
"Authorized" means approved by Franchisor in accordance with the procedures
established in this Agreement.
8.2 DISTRIBUTORS.
8.2.1 Operator acknowledges that it is generally unrealistic from a cost
and service basis to have more than one distributor in the market area of
Operator's System Operation, and that to obtain the lowest distribution costs,
all regional operators should only purchase from one authorized Smoothie Island
Express distributor. Operator agrees to only purchase all equipment, supplies,
Raw Materials and other products and materials necessary for the operation of
its System Operation solely from Authorized distributors, and other authorized
sources who demonstrate, to the continuing reasonable satisfaction of
Franchisor, the ability to meet Franchisor's then-current standards and
specifications for such items; who possess adequate quality controls and
capacity to supply Operator and all other System operators needs promptly and
reliably; who demonstrate the ability and willingness to work with Franchisor to
provide the assistance needed by the those operators in the region and all other
System Operators; who agree to distribute all authorized Smoothie Island Express
products; who comply with Franchisor's reasonable requirements; and who have
been approved in writing by Franchisor and not thereafter disapproved.
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8.2.2 If Operator desires to purchase any items from an unapproved
distributor, whom Operator desires to become an Authorized distributor, Operator
shall first submit a written request, in duplicate, for such approval to
Franchisor, addressed to (i) President, 1775 The Exchange, Suite 540, Atlanta,
Georgia and (ii) to David L. Siegel, Esq., General Counsel, 740 Broadway, New
York, New York 10003, accompanied by a similar written request for approval from
the proposed distributor. Franchisor shall have the right to require that the
proposed distributor provide reasonable financial, operational and economic
information regarding its business and that Franchisor's representatives be
permitted to inspect the proposed distributor's facilities and establish
economic terms, delivery, service and other requirements consistent with other
distribution relationships for other System Operations. The proposed distributor
shall pay to Franchisor in advance all of Franchisor's reasonable costs in
review of the application of the distributor to service the Operator as well as
all current and future reasonable costs related to inspecting and reinspecting
the distributor's facilities, equipment, Raw Materials in the distributor's
possession at any time. Franchisor may revoke its approval upon the
distributor's failure to continue to meet any of Franchisor's criteria. Nothing
in this article shall require Franchisor to approve any distributor. Upon the
receipt by Franchisor of Operator and the proposed distributor's request for
approval in full compliance of this article, Franchisor will notify Operator of
its decision within 90 days after receipt thereof. In the event an alternate
approved distributor to the recommended distributor is used by Operator, as a
condition thereof Operator and all other operators shall authorize the alternate
distributor to provide to Franchisor duplicate purchase invoices for
Franchisor's records and inspection purposes and to otherwise comply with
Franchisor's reasonable requests.
8.3 MANUFACTURERS.
8.3.1 The parties agree that Franchisor's product specifications and
portion control system are highly confidential information and are trade secrets
of Franchisor. In order to (i) achieve appropriate pricing, (ii) obtain those
specially formulated Smoothie Island Express authorized Raw Materials for
Operator and all of Franchisor's System Operation, and (iii) establish
consistent uniformity of Smoothie Island Express products, Operator acknowledges
that purchasing by all System or regional operators from approved manufacturers
or raw material is a necessity. Because of the importance of quality and
uniformity of product and the significance of product specifications and portion
control in the preparation of Authorized Products to achieve and maintain such
quality and uniformity, it is to the mutual benefit of the parties that
Franchisor closely control the production and distribution of the Raw Materials
used to produce authorized products sold by Operator. Similar considerations may
also apply to other products which Franchisor may develop in the future.
Operator therefore agrees to purchase only Raw Materials manufactured in
accordance with Franchisor's specifications and quality standards by approved
manufacturers who demonstrate, to the continuing reasonable satisfaction of
Franchisor, the ability to meet Franchisor's then-current standards and
specifications for such items; who possess adequate quality controls and
capacity to meet the needs of Operator and all other System Operators in a given
region or territory promptly and reliably; who demonstrate the ability and
willingness to work with Franchisor and to provide the assistance needed by the
Smoothie Island Express System and who have been approved in writing by
Franchisor and not thereafter disapproved.
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8.3.2 If Operator desires to purchase any items from an unapproved
manufacturer, who Operator desires to become an Authorized manufacturer,
Operator (i) shall first submit a written request, in duplicate, for such
approval to Franchisor, addressed to President: 1775 The Exchange, Suite 540,
Atlanta, Georgia 30339 and (ii) to General Counsel, 740 Broadway, New York, New
York 10003 accompanied by a similar written request for approval from the
proposed manufacturer. Franchisor shall have the right to require that the
proposed manufacturer provide reasonable financial, operational and economic
information regarding its business and that Franchisor's representatives be
permitted to inspect the proposed distributor's facilities and establish
economic terms, delivery, service and other requirements consistent with other
with other manufacturing relationships for other System Operations. The proposed
manufacturer shall pay to Franchisor in advance all of Franchisor's reasonable
costs in review of the application of the manufacturer to service the Operator
as well as all current and future reasonable costs related to inspecting and
reinspecting the manufacturer's facilities, equipment and Raw Materials at any
time. Franchisor may revoke its approval upon the manufacturer's failure to
continue to meet any of Franchisor's criteria. Nothing in this article shall
require Franchisor to approve any manufacturer. Upon the receipt by Franchisor
of Operator and the proposed manufacturer's request for approval in full
compliance of this article and the completion of all of the inspections needed
by Franchisor to evaluate the manufacturer, Franchisor will notify Operator of
its decision within 90 days after completion of such application and
inspections. If an alternate approved manufacturer to the recommended
manufacturer is used by Operator, as a condition thereof Operator and all other
operators shall authorize the alternate manufacturer to provide to Franchisor
duplicate purchase invoices for Franchisor's records and inspection purposes and
to otherwise comply with Franchisor's reasonable requests.
8.4 PURCHASE OBLIGATIONS.
Operator agrees to purchase the following items from the approved distributor
and manufacturer designated by Franchisor:
8.4.1 Cups, frozen fruits (strawberries, blackberries, pineapples,
peaches, etc.), cream branded sorbets, yogurt, Smoothie Island Express-branded
supplements and other branded supplements. Franchisor reserves the right to
authorize exceptions as circumstances warrant.
8.4.2 All Branded Smoothie Island Express Products that bear Franchisor's
Mark; Franchisor has a long term strategic plan to create another profit center
for Operator and itself by the sale of Smoothie Island Express branded products
in System Operations, supermarkets, grocery stores, etc. To accomplish this
goal, Franchisor intends to develop such products. To effectuate this long term
strategy, Operator agrees to cooperate with Franchisor with respect to the
purchase, display and sale of any Branded Products authorized for sale by
Franchisor. Operator consents to the receipt by Franchisor of licensing fees
from manufacturers who manufacture Branded Products which will compensate
Franchisor for such use of Franchisor's Marks.
8.4.3 Certain Smoothie Island Express standard exterior and interior
signs; These signs require the prior fabrication of sign molds or advance
production in quantity to be either
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affordable or promptly available. If Franchisor has entered into an agreement
with approved sign manufacturer(s), granting rights to use Franchisor's Marks in
connection with the signs and to sell such signs to SMOOTHIE ISLAND EXPRESS
operators, Operator agrees to purchase its signs from the authorized sign
manufacturer(s).
8.4.4 Coca-Cola fountain service products: Franchisor has entered into a
five (5) year agreement with the Coca-Cola Company to be the only approved
fountain service beverage supplier to the Smoothie Island Express System. In
Franchisor's judgment, the Coca-Cola Company offered the best economic terms
available for the Smoothie Island Express franchise system. Operator agrees to
only use the fountain service Coca-Cola products authorized by Franchisor and no
other beverages unless approved in writing by Franchisor.
8.4.5 Operator agrees that at such times that Franchisor establishes a
regional or national purchasing program for any of the Raw Materials, which may
benefit Operator by reduced price, lower labor costs, production of improved
Authorized Product(s), increased reliability in supply, improved distribution,
Raw Material cost control (establishment of consistent pricing for reasonable
periods to avoid market fluctuations), improved operations by Operator or other
tangible benefits to Operator, Operator will participate in such purchasing
program in accordance with the terms of such program.
ARTICLE 9. CONTINUING FRANCHISE FEES, REPORTS, BOOKS AND RECORDS.
9.1 CONTINUING FRANCHISE FEES.
9.1.1 Operator shall pay to Franchisor weekly during the term of this
Agreement and any renewals or extensions thereof, 8% of the weekly gross sales
of Operator's System Operation. For the purposes of this Agreement, "gross
sales," means gross revenues (excluding price discounts and allowances) received
by Operator as payment, whether in cash or for credit (and, if for credit,
whether or not payment is received therefor), for all beverages and other goods,
services, and supplies including all sales from approved co-brands as described
in Article 23 sold in or from each of Operator's System Operation, and gross
revenues received by Operator from any other business (including, but not
limited to, all revenues from any mechanical or other device, such as vending or
game machines installed at the Location) operated at the Location, excluding
sales taxes.
9.1.2 At Franchisor's request, Operator shall promptly execute or
re-execute within five (5) days after Franchisor's request, and deliver to
Franchisor appropriate pre-authorized check forms or such other instruments or
drafts required by Franchisor's bank, payable against Operator's bank account,
to enable Franchisor to electronically (draft on Operator's account by
electronic withdrawal), collect the 8% and 2% (see Article 6) of gross sales
payable under the terms of this Agreement. At Franchisor's request, Operator
shall within 5 days from such request promptly perform such acts as to enable
Franchisor or its designee to connect its computers to Operator's computer(s) or
Operator's POS System, so that Franchisor or its designee may electronically
obtain statistical information regarding Operator's business activities that
Franchisor may in its sole discretion request. Operator agrees to not disconnect
Franchisor or its designee from such connection or phone line at any time, for
any reason, without Franchisor's
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prior written approval. Operator specifically authorizes Franchisor to either
"upload" or "download" information in and from or to its computers, cash
registers or other such devices as allowed by law, as it relates to the System
Operation by internet, intranet, and other networks or other means as it becomes
available.
9.1.3 Operator shall report its gross sales by telephone within two (2)
days after the end of each business week (currently Tuesday) or at such other
times as are established by Franchisor in its sole discretion. Operator shall
submit written weekly summaries showing results of its operations by the
following Saturday. If Operator fails to report its sales on a timely basis,
Franchisor may estimate the amount of Operator's sales. Franchisor will then
deposit or transfer the reported, or in the absence of a report, the estimated,
amounts due into its own account, using the System Operator's pre-authorized
checks or other instruments. If any draft, electronic or otherwise, is unpaid
because of insufficient funds or otherwise, then Operator shall pay Franchisor's
expenses arising from such non-payment, including bank fees in the amount of at
least $30.00, hourly staff charges arising from such default, and any other
related expenses incurred by Franchisor. By the 5th day of each month Operator
shall pay to Franchisor any sums unpaid for the prior month to adjust for sales
owed for any partial week or sales that were unpaid, improperly recorded or not
credited on Operators books and records. Operator hereby agrees to pay any
sales, use or other tax now or hereinafter imposed on franchise fees,
advertising fees or any additional rental collected under the sublease for the
Location, imposed by any Federal, state or local governmental authorities.
Franchisor, at its sole discretion, may collect the taxes in the same manner as
franchise fees are collected herein and if Franchisor collects such taxes,
Franchisor shall promptly pay the tax collections to the appropriate
governmental authority.
9.2 REPORTS AND INSPECTION OF RECORDS.
9.2.1 Operator shall submit to Franchisor a quarterly Profit and Loss
Statement, signed and certified by Operator. The Profit and Loss Statement shall
be prepared by a Certified or Public Accountant, in accordance with generally
accepted accounting principles, and shall provide Operator's sales, expenses and
financial status with respect to Operator's System Operation. Operator shall
submit to Franchisor a copy of the original signed 1120 or 1120S tax form each
and every year or any other forms which take the place of the 1120 or 1120S
forms. Operator shall also provide Franchisor with copies of signed original
sales and use tax forms contemporaneously with their filing with the appropriate
state or local authority. Franchisor reserves the right to require such further
information concerning Operator's System Operation as Franchisor may from time
to time reasonably request.
9.2.2 Upon 10 days prior written notice, Franchisor, its agents or
representatives may audit Operator's books and records in accordance with
generally accepted standards established by certified public accountants. In
connection with such audit(s) or other operational visits, Operator agrees to
keep its cash receipts records, weekly and monthly control forms, accounts
payable records including all payments to Operator's suppliers in its System
Operation or at its business office for three (3) years after their due date,
which records shall be available for examination by Franchisor or its
representative(s), at Franchisor's request. Without any prior written notice,
Franchisor, its agents or representatives may inspect Operator's entire System
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Operation and Operator's daily, weekly and monthly statistical information
("Redbook Information") which is required under the Operational Manual. Operator
shall make such Redbook Information available for such inspections in
recognition that an operational inspection cannot succeed without review of
essential statistical information.
9.2.3 If any audit or other investigation reveals an under-reporting or
under-recording error of five (5%) percent or more, then in addition to any
other sums due, the expenses of the audit/inspection shall be borne and paid by
Operator upon billing by Franchisor, plus interest at the highest compound rate
authorized by the state in which the System Operation is located, but not to
exceed the rate of fifteen (15%) percent per annum.
9.2.4 Operator acknowledges that Franchisor's Operations Department
regularly reviews ongoing operations at System Operation to ensure consistency
of products and service and compliance with the Manuals and this Agreement.
Operator therefore agrees to promptly complete and submit all forms requested by
Franchisor's Operations Department, whether on a daily, weekly or monthly basis.
Non-compliance with this obligation constitutes a material violation of this
Agreement.
ARTICLE 10. COVENANT REGARDING OTHER BUSINESS INTERESTS.
10.1 For purposes of this Article only, "Operator" shall mean and include the
individual Operator; Operator's spouse and minor children; Operator's
shareholders, officers, and directors, if Operator is a corporation; and any one
or more partners or participants in Operator, if Operator is a partnership or
joint venture, or members, if Operator is an LLC.
10.2 Operator acknowledges that the Smoothie Island Express System is unique and
distinctive and has been developed by Franchisor at great effort, time, and
expense, and that Operator has regular and continuing access to valuable and
confidential information, training, and trade secrets regarding the Smoothie
Island Express System. Operator recognizes its obligations to keep confidential
such information as set forth herein. Operator therefore agrees as follows:
10.2.1 During the term of this Agreement, except with Franchisor's prior
written consent, Operator shall not, in any capacity whatsoever, either directly
or indirectly, individually or as a member of any business organization, engage
in the production or sale at retail or wholesale of any frozen beverage or any
other main course item authorized by Franchisor, now or in the future approved
by Franchisor for use in Operator's System Operation, or have any employment or
interest in any firm engaged in the production or sale of such products.
10.2.2 Upon the termination, expiration or nonrenewal of this Agreement,
or if Operator assigns or transfers its interest herein to any person or
business entity, or if any person identified in the first paragraph of this
Article terminates its relationship with Operator, then for a period of sixty
(60) months thereafter such Operator shall not, in any capacity whatsoever,
either directly or indirectly, individually or as a member of any business
organization, engage in the production or sale at retail of any smoothie type
food product, or have any employment or interest in any firm engaged in the
production or sale at retail or wholesale of any such products, at a site within
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a radius of five (5) miles of any of Operator's former System Operation or
within five (5) miles of any other System Operation or Distribution Point then
existing, unless Franchisor gives its prior written consent. If Operator
violates the terms of this paragraph, Operator shall pay to Franchisor, as
liquidated damages, an amount equal to $5,000 per month for each month this
covenant is violated, plus 8% percent of the gross sales achieved at the site
during the continuation of such violation.
10.2.3 In the event any portion of the above covenants violates laws
affecting Operator, or is held invalid or unenforceable in a final judgment to
which Franchisor and Operator are parties, then the maximum legally allowable
restriction permitted by law shall control and bind Operator. Franchisor may at
any time unilaterally reduce the scope of any part of the above covenants, and
Operator shall comply with any such reduced covenant upon receipt of written
notice.
10.3 The provisions of this Article shall not limit, restrain or otherwise
affect any right or cause of action which may accrue to Franchisor for any
infringement of, violation of, or interference with, this Agreement, or
Franchisor's Marks, System, trade secrets, or any other proprietary aspects of
Franchisor's business.
ARTICLE 11. INTERFERENCE WITH EMPLOYMENT RELATIONS.
Without Franchisor's prior written consent, during the term of this
Agreement, Operator shall not employ or seek to employ, directly or indirectly,
any person serving in an executive, managerial or operational position who is at
the time or was at any time during the prior six (6) months employed by
Franchisor or any of its subsidiaries. Request for Franchisor's consent shall be
sent in duplicate and addressed in writing to Franchisor's Vice-President of
Operations and to its General Counsel.
ARTICLE 12. SUBFRANCHISORS, SALESMEN.
Inasmuch as this Agreement has not been executed by the Operator at the
office of Franchisor, Franchisor requires certain assurances that this Agreement
has been sold in accordance with applicable laws, rules and regulations.
Accordingly, in order to induce Franchisor to execute this Agreement, Operator
agrees to execute a Rider/Questionnaire to this Agreement that acknowledges that
Franchisor is relying upon the acknowledgments, representations and commitments
of Operator that no other salesman, staff member, entity, or associate of
Franchisor has met Operator regarding this franchise sale or the offer and
acceptance thereof other than those set forth therein. The rider shall identify
all sales persons involved in the sales, negotiation and execution of this
Agreement and shall identify the subfranchisor. Franchisor shall be entitled to
rely on the Rider/Questionnaire, and Operator shall be bound by its contents.
ARTICLE 13. LOCAL MARKETING MANUAL.
Operator acknowledges that Franchisor's local marketing manual and other
marketing and advertising materials emphasize the implementation of marketing
efforts within a mile
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radius of Operator's System Operation. Such references, suggestions and emphasis
do not directly or indirectly grant to Operator a protected market or other
exclusive right within such 3 mile marketing area, but rather reflects the
reality that Operator's local marketing activities should initially be commenced
in the area immediately adjacent to its System Operation.
ARTICLE 14. NATURE OF INTEREST AND TRANSFER.
14.1 GENERAL PROVISIONS.
14.1.1 This Agreement shall inure to the benefit of the successors and
assigns of Franchisor. Franchisor shall have the right to transfer or assign
this Agreement to any person or legal entity who assumes its terms and agrees to
comply with Franchisor's obligations contained herein. Franchisor shall have no
liability for the performance of any obligations contained in this Agreement
after the effective date of such transfer or assignment.
14.1.2 The rights and duties created by this Agreement are personal to
Operator. Accordingly, except as otherwise permitted herein, neither Operator
nor any person with an interest in Operator shall, without Franchisor's prior
written consent, directly or indirectly sell, assign, transfer, convey, give
away, pledge, mortgage, or otherwise encumber any direct or indirect interest in
this Agreement or, if Operator is a partnership, joint venture, LLC or
corporation, any direct or indirect interest in Operator. Any such purported
assignment occurring by operation of law or otherwise without Franchisor's prior
written consent shall constitute a default of this Agreement by Operator, and
shall be null and void. Except in the instance of Operator advertising to sell
its System Operation pursuant to the terms hereof, Operator shall not, without
Franchisor's prior written consent, offer for sale or transfer at public or
private auction or advertise publicly for sale or transfer, the furnishings,
interior and exterior decor items, supplies, fixtures, equipment, Operator's
sublease or the real or personal property used in connection with Operator's
System Operation.
14.2 CONSENT TO TRANSFER.
For all proposed transfers or assignments of this Agreement, and transfers
of more than 51% of the outstanding and issued stock of Operator by one or more
transfers or any transfer which, directly or indirectly, effectively changes
management control of Operator, Franchisor will not unreasonably withhold its
consent to any transfer or assignment which is subject to the restrictions of
this Article, provided however, Franchisor shall not be required to give its
consent unless all of the following conditions are met prior to the effective
date of assignment:
14.2.1 Upon the execution of this Agreement and upon each direct or
indirect transfer of an interest in this Agreement or in Operator and at any
other time upon Franchisor's request, Operator shall, within five (5) days prior
to such transfer or at any other time at Franchisor's request, furnish
Franchisor with an estoppel agreement indicating any and all causes of action,
if any, that Operator may have against Franchisor or if none exist and a list of
all shareholders or partners having an interest in this Agreement or in
Operator, the percentage interest of each shareholder or partner, and a list of
all officers and directors, in such form as Franchisor may require.
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14.2.2 Operator's written request for transfer of either a partial or
whole interest in this Agreement or Operator's System Operation must be
accompanied by an offer to Franchisor of a right of first refusal at the same
price offered by any bona fide buyer less five (5%) percent Franchisor shall
have the right and option, exercisable within fifteen (15) days after receipt of
such written notification, to send written notice to Operator or such person
that Franchisor or its third-party designee, intends to purchase the interest
which is proposed to be transferred, on the same terms and conditions offered by
the third party. If Franchisor accepts such offer, the five (5%) percent
transfer/administrative fee due by Operator in accordance with Article 3 shall
be waived by Franchisor. Any material change in the terms of an offer prior to
closing shall cause it to be deemed a new offer, subject to the same right of
first refusal by Franchisor, or its third-party designee, as in the case of the
initial offer. Franchisor's failure to exercise such option shall not constitute
a waiver of any other provision of this Agreement, including any of the
requirements of this Article with respect to the proposed transfer.
14.2.3 The Operator is not in default under the terms of this Agreement,
the Manuals or any other obligations owed Franchisor, and all of its then-due
monetary obligations to Franchisor have been paid in full.
14.2.4 The Operator and its shareholders or members, if the Operator is a
corporation or limited liability company, have executed a general release under
seal, in a form prescribed by Franchisor, of any and all claims against
Franchisor, its affiliates, subsidiaries, shareholders, directors, officers,
subfranchisors and employees.
14.2.5 The transferee/assignee has demonstrated to Franchisor's
satisfaction that it meets all of Franchisor's then-current requirements for new
operators or for holders of an interest in a franchise, including, without
limitation, possession of good moral character and reputation, satisfactory
credit ratings, acceptable business qualifications, and the ability to fully
comply with the terms of this Agreement.
14.2.6 The transferee/assignee has assumed this Agreement by a written
assumption agreement approved by Franchisor, or has agreed to do so at closing,
and at closing executes an assumption agreement approved by Franchisor.
14.2.7 The transferee/assignee, its manager or other employees responsible
for the operation of the System Operation have satisfactorily completed
Franchisor's training program.
14.2.8 The transferee/assignee executes such other documents as Franchisor
may require, including a replacement franchise agreement on the then-standard
franchise agreement form used by Franchisor, in order to assume all of the
obligations of this Agreement, to the same extent, and with the same effect, as
previously assumed by the assignor.
14.2.9 At the completion of Operator's sale transaction, Operator shall
pay to Franchisor an administrative/transfer fee of five percent (5%) of the
gross selling price of Operator's System Operation or in the event of a nonsale
management transfer, a fee of $1,500 to cover Franchisor's training expenses.
This five percent (5%) administrative transfer fee will not be due with respect
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to any transfer that (together with all other related previous, simultaneous, or
proposed transfers) does not result in the transfer of control of Operator.
14.2.10 Operator's rights may pass to Operator's next of kin or legatee if
they assume Operator's obligations and attend and complete Franchisor's training
program. Upon Operator's disability, Operator may sell the franchise or keep it,
if operated by trained personnel.
14.2.11 Franchisor's consent to a transfer shall not constitute a waiver
of any claims it may have against the transferring party arising out of this
Agreement or otherwise.
14.2.12 If Operator is an individual, Franchisor hereby consents to the
assignment of this Agreement and any and all obligations referable thereto
without any fee charged by Franchisor to a corporation principally owned by
Operator within ninety (90) days after the date hereof. Upon such assignment and
assumption by the corporation along with delivery of executed originals of same
to Franchisor, the individual Operator shall be released from any and all
personal liability.
ARTICLE 15. TERM, DEFAULT AND TERMINATION.
15.1 TERM.
15.1.1 Provided Operator is not in default of the terms and conditions
contained in its Location sublease and this Agreement, this Agreement shall
continue for a period of twenty (20) years or for any longer period coterminous
with the term of the Location sublease.
15.1.2 Operator may renew the rights granted by this Agreement for four
(4) additional terms of five (5) years each, subject to the following
conditions:
15.1.2.1 Operator gives Franchisor written notice of Operator's
election to renew not less than six (6) and not more than twenty-four (24)
months before the end of the then current term;
15.1.2.2 Operator is not in default of any provision of this
Agreement or any amendments to this Agreement, the Location sublease, the
Manuals or any monetary obligation owed to Franchisor or its affiliates; and
15.1.2.3 At Franchisor's request, Operator shall undertake and
complete the reasonable renovation or modernization of its System Operation.
15.1.2.4 Operator shall execute Franchisor's then-current franchise
agreement and related agreements.
15.2 DEFAULTS WITHOUT OPPORTUNITY TO CURE.
Operator shall be in default and Franchisor may, at its option, upon thirty (30)
days written notice to Operator, terminate this Agreement and all rights granted
by it, without affording
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Operator any opportunity to cure the default, upon the occurrence of any of the
following events:
15.2.1 Operator's knowingly or intentionally maintaining false books or
records, or submitting any false report or payment to Franchisor;
15.2.2 Operator's conduct of the System Operation licensed pursuant to
this Agreement is so contrary to this Agreement, the System and the Manuals as
to constitute an imminent danger to the public health (for example, selling
spoiled food knowing that the food products are spoiled or allowing a dangerous
condition arising from a lack of security for customers to continue despite
Operator's knowledge of such condition), or selling regularly unauthorized
products to the public after notice of default and continuing to sell such
products whether or not Operator has cured the default after one or more
notices;
15.2.3 The conviction of a felony, or a crime involving moral turpitude,
or any other crime or offense that is reasonably likely, in the sole reasonable
opinion of Franchisor, to adversely affect the System, Franchisor's Marks; the
goodwill associated with the System or Franchisor's interest in each of them by
Operator's, or its controlling or operating shareholders or members if Operator
is a limited liability company, or Operator's partners if Operator is a
partnership, excluding non-managing partners
15.2.4 Operator's intentional disclosure or use of the contents of the
Manual, trade secrets or confidential or proprietary information provided to
Operator by Franchisor in violation of this Agreement, excluding acts of
independent employees or others not under Operator's control; or
15.2.5 If Operator repeatedly commits defaults under any provisions of
this Agreement eight (8) or more occasions in any twelve (12) month period, or
sixteen (16) or more occasions in any consecutive twenty-four (24) month period,
even if Operator cured each such prior default, and even if Operator would
otherwise be given an opportunity to cure the current default.
15.2.6 Operator's, without Franchisor's consent, ceasing to operate or
otherwise abandoning its System Operation or, upon destruction of its System
Operation, failure to rebuild and resume operation within a reasonable time.
Cessation of the business shall not constitute a default under this Agreement if
caused by condemnation, expiration of a Location lease pursuant to its terms at
execution, natural, governmental or supplier related causes out of Operator's
control, or when failure to rebuild following destruction of the System
Operation is prohibited by law or the Location lease. In the event of
termination pursuant to this subsection 15.2.6, the written notice period shall
commence five days from the date Franchisor sends written notice to Operator. At
the expiration of this time period, this Agreement shall be deemed terminated.
For purposes of this article, ceasing to operate or otherwise abandoning its
System Operation shall be defined as Operator's failure to open its System
Operation for business for 5 consecutive days.
15.3 DEFAULTS WITH OPPORTUNITY TO CURE.
15.3.1 Except as otherwise provided in this Agreement, Operator shall have
ten (10) days after Franchisor's written notice of default within which to
remedy any default under this
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Agreement, and to provide evidence of such remedy to Franchisor. If any such
default is not cured within that time period, or such longer time period as
applicable law may require, Franchisor may, at its option, terminate this
Agreement and all rights granted by it, by sending a five (5) day written notice
of cancellation of this Agreement to Operator. Upon the expiration of such five
(5) day period, this Agreement shall end and expire as if it were the day fixed
for termination of this Agreement.
15.3.2 Operator shall be in material default under this Article for any
failure to comply with any of the requirements imposed by this Agreement. Such
material defaults shall include, without limitation, the occurrence of any of
the following events:
15.3.2.1 Operator's failure, refusal, or neglect to promptly pay any
monies owed to Franchisor, its subsidiaries or affiliates, when due, or to
submit the financial or other information required by Franchisor under this
Agreement.
15.3.2.2 Operator's failure to maintain the standards specified by
Franchisor in the Manual or otherwise.
15.3.2.3 Operator's failure, refusal or neglect to obtain
Franchisor's prior written approval or consent as required by this Agreement.
15.3.2.4 Operator's misuse or unauthorized use of Franchisor's Marks
or other material impairment of the goodwill associated therewith or
Franchisor's rights therein.
15.3.2.5 Operator's commencement or conducting of any business
operation, or marketing of any product, under a name or mark which, in
Franchisor's reasonable opinion, is confusingly similar to Franchisor's Marks.
15.3.2.6 Operator's default, without cure after the applicable grace
period, under any lease, sublease, sub-sublease, mortgage, or deed of trust
covering the Location.
15.3.2.7 Operator's failure to procure or maintain the insurance
required by this Agreement or in the lease and sublease for the Location.
15.3.2.8 Operator's default in the performance of any term,
condition or obligation in payment of any indebtedness to its landlord or
sublandlord, distributors or suppliers or others arising out of the purchase of
inventory, supplies or purchase or lease of equipment for operation of its
System Operation, and if any such default is not cured within thirty (30) days
after written notice by Franchisor to Operator, unless Operator is determined by
a court of competent jurisdiction to be not in default.
15.4 In the event of a default by Operator, all of Franchisor's costs and
expenses arising from such default, including reasonable legal fees and
reasonable hourly charges of Franchisor's administrative employees shall be paid
to Franchisor by Operator within five (5) days after cure.
15.5 Notwithstanding the obligations of Operator and Franchisor to arbitrate all
disputes and
22
<PAGE>
other conflicts, Operator and Franchisor acknowledge that certain defaults
require immediate action to protect the appropriate party. Accordingly,
Franchisor and Operator each hereby consent to and authorize the other party to
apply to any court of competent jurisdiction for judicial assistance in
restraining and enjoining violations of this Agreement. Both Franchisor or
Operator are entitled to an injunction restraining Franchisor or Operator from
committing or continuing to commit any default, breach or threatened breach of
this Agreement, without showing or proving any actual damage sustained by the
party seeking such relief.
15.6 Non-enforcement by Franchisor of any violation of the terms of this
Agreement by Operator shall not constitute a waiver of such violation by
Franchisor nor shall Franchisor be deemed to have waived any of its rights to
enforce compliance by Operator of such breach or any other breach of this
Agreement.
ARTICLE 16. RIGHTS AND OBLIGATIONS UPON TERMINATION.
Upon the termination of Operator's rights granted under this Agreement, (whether
during the term of the Agreement or at its conclusion) the following apply:
16.1 Upon termination of this Agreement by lapse of time or by default,
Operator's right to use Franchisor's Marks, or any other mark distributed by
Franchisor or insignia or slogan used in connection therewith, or any
confusingly similar trademark, service mark, trade name or insignia shall cease.
Operator shall immediately discontinue use of Franchisor's Marks, System, and
color scheme. Operator shall at its own cost, make cosmetic changes to
Operator's System Operation from Franchisor's proprietary designs including, but
not limited to, the removal of all SMOOTHIE ISLAND EXPRESS identifying materials
and distinctive Smoothie Island Express cosmetic finishes, tile walls, interior
wall coverings and colors, exterior finishes and colors, signage and Smoothie
Island Express counter equipment (which shall be deemed proprietary to
Franchisor) from the Location as Franchisor may reasonably direct.
16.2 Franchisor may retain all fees paid pursuant to this Agreement.
16.3 Any and all obligations of Franchisor to Operator under this Agreement
shall immediately cease and terminate.
16.4 Any and all rights of Operator under this Agreement shall immediately cease
and terminate.
16.5 In no event shall a termination or expiration of this Agreement affect
Operator's obligations to take or abstain from taking any action in accordance
with this Agreement. The provisions of this Agreement which constitute
post-termination covenants and agreements including the obligation of Franchisor
and Operator to arbitrate any and all disputes shall survive the termination or
expiration of this Agreement.
16.6 Operator acknowledges and agrees that rights in and to Franchisor's Marks
and the use thereof shall be and remain the property of Franchisor.
23
<PAGE>
16.7 If Operator has registered any of Franchisor's Marks or the name "SMOOTHIE
ISLAND" as part of Operator's assumed, fictitious or corporate name, Operator
shall promptly amend such registration to delete Franchisor's Marks therefrom.
16.8 Operator shall immediately pay any and all amounts owing to Franchisor, its
subsidiaries and affiliates.
16.9 Franchisor shall have the option, exercisable by written notice within
thirty (30) days after the termination of this Agreement, to take an assignment
of all telephone numbers (and associated listings) for Operator's System
Operation. Operator is not entitled to any compensation from Franchisor, if
Franchisor exercises this option.
ARTICLE 17. INSURANCE.
17.1 Operator shall obtain and maintain insurance coverage which shall in each
instance designate Franchisor, and its subsidiaries, as an additional named
insured, with an insurance company approved by Franchisor, which approval shall
not be unreasonably withheld as follows:
17.1.1 Comprehensive general liability insurance (including products
liability and sexual harassment coverage); with coverage of $1,000,000 to
$3,000,000 combined single limit for death, personal injury, and $100,000
property damage coverage.
17.1.2 Business interruption insurance, including Location rentals and
Additional Rentals for twelve (12) months after casualty, in amounts equal to at
least $100,000.
17.1.3 Workers' compensation insurance (coverage B) as required by
applicable law.
17.1.4 Fire, and extended coverage insurance, insuring the construction of
improvements and completed System Operation operated by Operator, for the full
replacement value thereof.
17.1.5 If Operator establishes a delivery service for Authorized Products,
Operator shall obtain separate non-owned auto coverage insurance. Operator may
not directly or indirectly deliver any Authorized Products until such insurance
is obtained and Franchisor named as additional insured therein.
17.2 In the event of damage to the System Operation covered by insurance, the
proceeds of any such insurance shall be used to restore the System Operation to
its original condition as soon as possible, unless such restoration is
prohibited by the Location lease or Franchisor has otherwise consented to in
writing. Upon obtaining such insurance, Operator shall promptly provide to
Franchisor proof of such insurance coverage and/or at such other times upon the
request of Franchisor.
17.3 Operator shall, prior to opening its System Operation, file with
Franchisor, certificates of such insurance and shall promptly pay all premiums
on the policies as they become due. In addition, the policies shall contain a
provision requiring thirty (30) days prior written notice to Franchisor of any
proposed cancellation, modification, or termination of insurance. If Operator
24
<PAGE>
fails to obtain and maintain the required insurance, Franchisor may, at its
option, in addition to any other rights it may have, procure such insurance for
Operator without notice and Operator shall pay, upon demand, the premiums and
Franchisor's costs in taking such action.
ARTICLE 18. SOLE OBLIGATIONS OF FRANCHISOR.
18.1 As described in Franchisor's UFOC, received by Operator at least ten (10)
business days prior to the execution of this Agreement, Franchisor has obligated
itself to provide specific services to Operator. Franchisor also provides other
voluntary services at its sole discretion. Franchisor and Operator agree that
the following are the only required obligations of Franchisor:
18.1.1 To approve the Location of Operator.
18.1.2 To reasonably assist Operator with any operational or financial
problem encountered by Operator, after notice to Franchisor in duplicate sent
to: (i) Franchisor c/o General Counsel, 740 Broadway - 12th Floor, New York, New
York 10003; and (ii) Vice President - Operations, 1775 The Exchange, Suite 540,
Atlanta, Georgia 30339 by certified mail (return receipt requested) or at any
subsequent addresses established by Franchisor, of Operator's problem and the
type of assistance needed. At no time shall reasonable assistance be interpreted
to require Franchisor to pay any money to Operator. Franchisor, in its sole
discretion, may provide any assistance at Franchisor's designated office or
where Operator is located, at a time to be determined by Franchisor.
18.1.3 To reasonably administer to the advertising program. Operator
acknowledges that pursuant to the advice of advertising and marketing
professionals, advertising collections will at times be aggregated until
sufficient revenues are accumulated to commence or complete an advertising or
marketing program. Reasonable administration shall be deemed to be good faith
attempts to utilize the advertising funds in accordance with the advice and
suggestions of the advertising and marketing staff or outside advertising and/or
marketing companies, consultants or other entities retained for such purpose.
18.1.4 To assist Operator in arranging for the initial financing of its
System Operation, if feasible and necessary (Franchisor is not directly or
indirectly responsible for the failure of Operator to meet the qualifying
standards of such independent financing sources).
18.1.5 To supply to Operator a set of standard decor and layout plans and
to thereafter approve the initial decor and layout of Operator's System
Operation.
18.1.6 To loan Operator a copy of its Operations Manual or computer
diskette thereof which manual contains mandatory and suggested specifications,
standards and procedures. This Manual is confidential and remains Franchisor's
property.
18.1.7 To train Operator in accordance with Article 3 herein, and to
provide representatives of Franchisor to assist in opening the System Operation.
18.2 Franchisor shall not, and can not be held in breach of this Agreement until
(i) Franchisor
25
<PAGE>
has received notice of any alleged breach from Operator in duplicate, by
registered mail, sent to the parties set forth in paragraph 18.1.2 of this
Article; and (ii) Franchisor has failed to remedy the breach within a reasonable
period of time after such notice, which period shall not be less than sixty (60)
days. This is a material term of this Agreement and may not be modified or
changed by any arbitrator in an arbitration proceeding or otherwise in any court
of competent jurisdiction.
ARTICLE 19. POINT OF SALE SYSTEM, COLLECTION OF DATA.
19.1 This Agreement and the Manuals require the submission of weekly statistical
control forms as well as other financial, operational and statistical
information required by Operator and Franchisor to: (i) assist Operator in the
operation of its System Operation in accordance with the System; (ii) allow
Franchisor to monitor the Operator's gross sales, purchases, costs and expenses;
(iii) enable Franchisor to develop chainwide statistics which may improve bulk
purchasing; (iv) assist Franchisor in the development of new authorized products
or the removal of existing unsuccessful Authorized Products; (v) enable
Franchisor to refine existing Authorized Products; (vi) generally improve
chainwide understanding of the System; and (vii) obtain new types of information
unknown at this time (collectively, the "Information"). To achieve these
results, cash collection and data processing systems are necessary.
19.2 Operator agrees to purchase and use the point of sale cash collection and
data processing system (the "POS System") and only the specified software
authorized by Franchisor, as specified in the Construction and Equipment Manual
or otherwise by Franchisor in writing. The POS System includes a PC based cash
register, register tape printer, magnetic stripe reader, cash drawer, defined
Franchisor polling and register software and telecommunications equipment.
19.3 Operator agrees to (i) connect the POS System to Operator's telephone
line(s); (ii) maintain it in good working order; and (iii) not disconnect any
POS System connection or phone line at any time, for any reason, without prior
written approval. Operator agrees, at Franchisor's request, to maintain
membership in a designated third party network (such as CompuServe, AOL,
Prodigy, etc.) for the purpose of implementing, transmitting, collecting and
maintaining any Information or data exchange system. Operator specifically
authorizes Franchisor to either "upload" or "download" information in and from
or to its computers, cash registers or other such devices as allowed by law, as
it relates to the System Operation by internet, intranet, and other networks or
other means as it becomes available.
19.4 Operator agrees to pay to Franchisor up to $13 weekly (subject to
reasonable annual increases), in the manner provided under Article 9 herein, for
support service for the POS System software during the term of its franchise and
any renewals. This fee will be collected by Franchisor for payment to 1 or more
3rd party suppliers who are designated by Franchisor to provide the support
service. The 3rd party suppliers will provide 24-hour telephone support and
annual maintenance for any upgrades and enhancements that they make to the
required POS System software. Franchisor may cancel this service on 30 days'
written notice to Operator, and may resume these services at any time with any
supplier Franchisor chooses. Franchisor may revise the POS specifications.
Operator may be required to upgrade or update its POS System recording system.
On Franchisor's request, Operator must apply for and maintain debit cards,
credit cards
26
<PAGE>
or other non-cash payment systems to enable customers to purchase products
through these procedures. There is no contractual limitation on Franchisor's
right to receive information through the POS System.
ARTICLE 20. RELATIONSHIP OF PARTIES, DISCLOSURE.
20.1 Franchisor and Operator are not and shall not be considered joint ventures,
partners, or agents of each other, or anything other than Franchisor and
Operator, and neither shall have the power to bind or obligate the other except
specifically as set forth in this Agreement. Franchisor and Operator agree that
the relationship created by this Agreement is not a fiduciary relationship.
Operator shall not, under any circumstances, act or hold itself out as an agent
or representative of Franchisor. Operator agrees to indemnify and hold
Franchisor harmless from any claims, demands, liabilities, actions suits or
proceedings asserted by third parties arising out of the operation of Operator's
System Operation or Operator's breach of any of the terms of this Agreement.
Franchisor agrees to indemnify and hold Operator harmless from any claims,
demands, liabilities, actions, suits or proceedings asserted by third parties
and arising out of Franchisor's operations unless caused by Operator.
20.2 As set forth in the UFOC delivered to Operator as described above, Operator
acknowledges that Franchisor has entered into certain subfranchise agreements
with subfranchisors and/or area developers in certain areas and territories.
Pursuant to these contracts, the subfranchisors of Franchisor are obligated to
provide certain sales, operational and support services for Franchisor. Operator
acknowledges that the relationship between Franchisor and all of its
subfranchisors and/or area developers is strictly contractual and that no
subfranchisor and/or area developer is an agent of Franchisor. Accordingly,
Operator acknowledges and agrees that any past, current or future subfranchisor
is not the actual, express or implied agent of Franchisor, and has no power or
authority to: (i) act on Franchisor's behalf; (ii) enter into or execute any
agreement on Franchisor's behalf; (iii) make any representation or promise on
Franchisor's behalf; or (iv) bind Franchisor in any way. Unless otherwise
specifically agreed to in writing, Franchisor expressly disavows any acts by
others, including subfranchisors, that purport to bind Franchisor in any way.
Operator agrees to waive any claim or defense in any litigation or arbitration
proceeding that a subfranchisor is the express or implied agent of Franchisor.
Operator agrees that any attempt to raise, assert or justify such claim or
defense in any proceeding constitutes a material default of this Agreement.
ARTICLE 21. DISPUTE RESOLUTION: ARBITRATION AND LEGAL PROCEEDINGS.
21.1 Franchisor and Operator acknowledge that disputes or disagreements may
arise during the term of this Agreement and any renewals thereto. Franchisor and
Operator have elected to resolve such disputes or disagreements in a
non-judicial alternative dispute resolution format ("ADR"). An ADR format
minimizes the expense of dispute resolution and generally can be accomplished in
a more expeditious and effective manner. By agreeing to an ADR format, both
Operator and Franchisor are also waiving a number of rights, remedies and
privileges which may arise in a judicial resolution format. In view, however, of
the continuing relationship between Operator and Franchisor over the original
and renewal terms of this Agreement, both Operator
27
<PAGE>
and Franchisor agree that an ADR format is the most economical, efficient and
practical way to resolve disputes and disagreements.
21.2 Accordingly, except as otherwise provided in this Agreement, in the event
of any dispute or disagreement between Franchisor and Operator with respect to
any issue arising out of or relating to this Agreement, its breach, its
interpretation or any other disagreement between Operator and Franchisor, such
dispute or disagreement shall be resolved by arbitration. In the event of any
dispute or disagreement, Operator and Franchisor both agree to submit the
dispute to arbitration in accordance with the least expensive procedure of the
American Arbitration Association ("AAA"), and the application for such
arbitration shall be filed in the AAA's New York City office . Franchisor and
Operator agree that the hearing(s) shall be held in the City of New York, State
of New York , before one Arbitrator. This paragraph shall not apply to any
monetary defaults of Operator, including Operator's obligation to pay franchise
and advertising fees to Franchisor, and Franchisor shall be free to utilize any
right or remedy it may have at law or equity.
21.3 Franchisor and Operator agree that this Agreement evidences a transaction
involving interstate commerce and that the enforcement of this arbitration
provision and the confirmation of any award issued to either party by reason of
an arbitration conducted pursuant to this arbitration provision is governed by
the Federal Arbitration Act, 9 U.S.C. ss.1 et seq.
21.4 Punitive or exemplary damages or attorney's fees may not be awarded by the
arbitrator(s), and any such award shall not be enforceable or enforced by any
court. Except as otherwise provided, each party shall bear its own attorney's
fees, expert witness fees, and other court costs incurred in connection with any
legal action or arbitration between Franchisor and Operator. If the waiver of
punitive or exemplary damages or legal fees and related costs are in violation
of the laws of the state where the Operator's System Operation is located, such
claims may be awarded by the arbitrator(s), and any such award shall be
enforceable or enforced in any court of appropriate jurisdiction. This agreement
shall be strictly construed in the arbitration hearing. In no event can the
material provisions of this Agreement including, but not limited to the method
of operation, Authorized Product line or monetary obligations specified in this
Agreement, amendments to this Agreement or in the Manuals be modified or changed
by the arbitrator at the arbitration hearing.
21.5 Except for injunctive relief (including temporary restraining orders,
preliminary injunctions and injunctions or similar relief which must be brought
in an appropriate local forum), any legal proceeding authorized by this
Agreement shall be commenced only in the Federal District Court for the Southern
District of New York and both Franchisor and Operator consent to the
jurisdiction in the Federal District Court for the Southern District of New
York. In the event the parties do not meet the jurisdictional requirements for
Federal Court, the parties consent to jurisdiction in the Supreme Court, New
York County, State of New York. Operator agrees that mailing to its last known
address by certified mail of any process shall constitute lawful and valid
process. In all cases, Operator and Franchisor each waives any right to a trial
by jury. Notwithstanding the foregoing, if the laws of the state where
Operator's System Operation is located requires jurisdiction of the courts of
that state or control by the laws of that state, then this Agreement shall be
deemed modified to comply with the applicable laws thereto.
28
<PAGE>
21.6 The terms of this article shall survive termination, expiration or
cancellation of this Agreement.
ARTICLE 22. EXECUTION, REQUESTS, CONSENTS AND WAIVERS.
22.1 This Agreement takes effect upon its acceptance and execution by Operator
and Franchisor, and shall be governed by and construed in accordance with the
laws of the State of New York, USA. Franchisor will consider written requests by
Operator for Franchisor's consent to a waiver of any obligation imposed by this
Agreement. Operator agrees, however, that Franchisor is not required to act
uniformly with respect to waivers, requests and consents as each request will be
considered on a case by case basis, and nothing shall be construed to require
Franchisor to grant any such request. Any waiver granted by Franchisor shall be
without prejudice to any other rights Franchisor may have, will be subject to
continuing review by Franchisor, and may be revoked, in Franchisor's sole
discretion, at any time and for any reason, effective upon ten (10) days prior
written notice to Operator. Franchisor makes no warranties or guarantees upon
which Operator may rely, and assumes no liability or obligation to Operator by
providing any waiver, approval, consent, assistance, or suggestion to Operator
in connection with this Agreement, or by reason of any neglect, delay, or denial
of any request.
22.2 Unless otherwise provided, whenever this Agreement requires Operator to
obtain Franchisor's prior written consent, Operator shall timely address its
written request for such consent in duplicate to the parties set forth in
paragraph 2 of Article 18 or such other persons as Franchisor may designate in
writing. Franchisor will then consider such request and advise Operator of the
decision, in writing, within forty-five (45) days. Franchisor's failure to
advise Operator will constitute Franchisor's consent to such request. The
forty-five (45) day period shall not begin to run, however, until Operator has
provided Franchisor with all information and documentation requested by
Franchisor. Neither Operator nor Franchisor shall be deemed to have waived or
impaired any right, power or option reserved by this Agreement, including,
without limitation, its right to demand strict compliance with every term,
condition, and covenant herein, or to declare any breach thereof a default and
to terminate this Agreement prior to the expiration of its term, by virtue of
any custom or practice of the parties at variance with the terms hereof; by any
forbearance, delay, failure, or omission to exercise any right, power, or
option, whether of the same, similar, or different nature, against Franchisor,
Operator, or any other operator; or by the acceptance of any payments due after
any breach of this Agreement.
ARTICLE 23. MISCELLANEOUS PROVISIONS.
23.1 This Agreement may be executed in any number of counterparts, each of
which, when so executed and delivered, shall be deemed an original, but such
counterparts together shall constitute but one and the same instrument.
23.2 This Agreement (as further explained in the UFOC) contains the entire
agreement of the parties and cannot be modified, changed or amended except in
writing and signed by Franchisor.
23.3 There is no other agreement, representation or warranty made by Franchisor
or any other
29
<PAGE>
entity or person associated with Franchisor other than contained in this
Agreement. This Agreement is not subject to or conditioned upon the obtaining of
a Location for Operator's System Operation.
23.4 Except as otherwise provided, each party shall bear its own attorney's fees
arising from the negotiations and execution or lack of execution of this
Agreement, and any expert witness fees, and other court costs incurred in
connection with any violation of this Agreement.
23.5 Each article, paragraph, subparagraph, term, and condition of this
Agreement shall be considered severable. If for any reason, any portion of this
Agreement is determined to be invalid or in conflict with any law or rule in a
final ruling issued by any court, agency, or tribunal with valid jurisdiction in
a proceeding to which Franchisor is a party, that ruling shall not effect the
validity or enforceability of any other portion of this Agreement.
23.6 All notices to Franchisor required by the terms of this Agreement, unless
otherwise provided, shall be sent by certified or registered mail or by
overnight delivery service, addressed to the parties set forth in this
Agreement, or at such other address as Franchisor designates. All notices to
Operator required by the terms of this Agreement shall be sent by certified or
registered mail or by overnight delivery service, addressed to Operator at the
Location, or at such other or additional address as Operator designates in
writing. If Operator refuses acceptance of any certified, registered or
overnight delivery, acceptance shall be deemed to have occurred forty-eight (48)
hours after rejection of such notice.
23.7 Operator acknowledges that the evolution of the System requires the
development of Nontraditional SMOOTHIE ISLAND EXPRESS juice bars, and Smoothie
Island Express Distribution Points and Branded Products.
23.8 For the purpose of this article, a co-brand shall be defined as an
independent operating system owned by another entity (not Franchisor) that is
incorporated as an operational part within the Operator's System Operation.
Subject to Franchisor's prior written approval, Operator may install approved
co-branding marketing systems to be operated in conjunction with Operator's
System Operation. Franchisor shall not be required to approve any co-branding
marketing system unless Franchisor has recognized that co-branding system as an
approved co-brand for operation within its System Operation, either nationally
or regionally. Inasmuch as Operator and its employees will be incorporating the
co-brand within its System Operation, all sales of the co-brand shall be
included within the definition of "gross sales" as defined in Article 9 herein
and Operator shall pay to Franchisor franchise and advertising fees for such
sales.
30
<PAGE>
IN WITNESS WHEREOF, the parties hereof have executed this Agreement as of
the date of execution by Franchisor.
Smoothie Island Co.
an Unincorporated Division
of Maui Tacos International, Inc.
By:
- -------------------------------- -------------------------------------
Date of Execution Vice President
Executed as of the date first <<FranchiseName>>
above written.
By:
-------------------------------------
<<IndividualName>>, <<Title>>
NAME OF STOCKHOLDERS AND OFFICERS
By execution of this Agreement, the undersigned stockholder(s) of the corporate
Operator, or members of the LLC, or the individual Operator hereby personally
accepts and agrees to comply with Article 10 of this Agreement and acknowledges
that the Franchisor has executed this Agreement in reliance upon the commitments
contained in this Paragraph.
The names and addresses of all stockholders of the corporate operator or members
of the LLC Operator are set forth below.
-------------------------------------
<<IndividualName>>
By:
--------------------------------
Name, Title
--------------------------------
Address
31
Exhibit 23.1
Consent
We consent to the incorporation by reference in the Registration Statement (Form
S-8/S-3 No. 333-01530) pertaining to the Blimpie International, Inc. Omnibus
Stock Incentive Plan of our report dated December 3, 1999, with respect to the
consolidated financial statements and schedule of Blimpie International, Inc.
included in the Annual Report (Form 10-K) of Blimpie International, Inc. and
subsidiaries for the year ended June 30, 1999.
/s/ Ernst & Young, LLP
Atlanta, Georgia
December 13, 1999
Exhibit 23.2
Consent
We consent to the incorporation by reference in the Registration Statement (Form
S-8/S-3 No. 333-01530) pertaining to the Blimpie International, Inc. Omnibus
Stock Incentive Plan of our report dated August 17,1998, with respect to the
consolidated financial statements and schedule of Blimpie International, Inc.
included in the Annual Report (Form 10-K) of Blimpie International, Inc. and
subsidiaries for the years ended June 30, 1998 and 1997.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
December 13, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at June 30, 1999 (Unaudited) and the Consolidated
Statement of Operations and Comprehensive (Loss) Income for the year ended June
30, 1999 (Unaudited) and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 4,682
<SECURITIES> 5,296
<RECEIVABLES> 3,498
<ALLOWANCES> 392
<INVENTORY> 0
<CURRENT-ASSETS> 13,824
<PP&E> 3,525
<DEPRECIATION> 1,776
<TOTAL-ASSETS> 28,258
<CURRENT-LIABILITIES> 4,237
<BONDS> 0
0
0
<COMMON> 96
<OTHER-SE> 18,011
<TOTAL-LIABILITY-AND-EQUITY> 28,258
<SALES> 33,550
<TOTAL-REVENUES> 33,550
<CGS> 20,621
<TOTAL-COSTS> 20,621
<OTHER-EXPENSES> 12,156
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,956
<INCOME-TAX> 800
<INCOME-CONTINUING> 1,156
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (3,373)
<NET-INCOME> (2,217)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
